Is 10% Earnest Money too much?
Wholesaler · Atlanta, GA · Member since 2015 · 32 posts · 4 votes
Is 10% Earnest Money too much?
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Roy N.Pro Member
Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votesOnce upon a time 10% was standard here ... but with the "forever ascending" real estate prices most Canadian markets have witnessed over the past two decades, deposits as a percentage of price tag have dropped dramatically.
I disagree with @Arlan Potter, 10% is not way too much. If we are selling a well maintained, up-to-date, performing property and are looking for a cash buyer, we may ask for a 10% deposit - depending on the final price tag. Part of the reason is to weed-out the wholesalers posing as buyers and the tyre kickers who aren't ready to play.
When the shoe is on the other foot, we have offered earnest money as high as 25% to convey we are serious and ready to go. We once made a 100% deposit on an REO we were after. We have never offered less than 5%.
74 Replies
- Real Estate Consultant · Brighton, MI · Member since 2013 · 607 posts · 251 votes10y
I work as a full time Realtor in Southeast Michigan where rent ready investment property market is hot. I use many of the same practices for investors clients. Generally, if purchasing an income property under $100K, I would recommend $500 Refundable EMD. Anything $100K and over is $1000 refundable EMD. I always specify "refundable" to protect my clients interests. All EMDs are made out to my brokerage but for those not working with Realtors, I would recommend you make checks out to closing attorney escrow or to title agency only.
However, cash buyers can pluck down slightly more to place their offer on stronger footing. I just recently helped a cash buyer secure a $52K income property with Proof of Funds and $1000 EMD. I would never recommend an EMD higher than that because not only is it unnecessary and risky, as Ashley already pointed out.
Seller's only want proof of three things:
1. You have the money or access to it.
2. You're serious.
3. You have everything in place and intend to close in a reasonable amount of time.
There was also a mention of someone losing an EMD because deal closed one day after contract date, well you can easily protect yourself (and your clients) by having both parties sign an Addendum that would extend the date to close when you know there will be a delay.
- Investor · Springfield, VT · Member since 2014 · 158 posts · 75 votes10y
My EMD is all part of my offer negotiation. I buy bank REO's. The house that ended up being my personal residence I really wanted as it was listed under $50k and the current fair market value was $150k. There was 10 offers on the house in the first 3 days so my first offer was full price all cash, 10 day escrow, $10k deposit. They countered asking for highest and best offers... So I offered $62.5k, $30k EMD, 10 day escrow which they accepted over other offers that were at least $10k higher than mine as one of the losing bidders offered me $75k the day after my offer was accepted.
Often times, the amount of the EMD doesn't matter, sometimes it matters a whole lot. Oh, I also included my bank statement which at the time showed a mid 6 figure balance showing them I'm a real, serious, qualified cash buyer.
- Wholesaler · Atlanta, GA · Member since 2015 · 32 posts · 4 votes10y
Originally posted by @Brian Karr:
For me, the actual dollar amount (and not the percentage) is the important thing. In California (where I am) everything is expensive, so percentages tend to drive up the actual dollar amount pretty quickly. It's the dollar amount that determines my comfort level at any given time. My goal is always to give no EMD.
For the point that people are making about using a high EMD as a way to weed out wholesalers posing as cash buyers, or getting skin in the game, etc... This is may answer when a seller (who knows I'm an investor) says that to me.
"I'm an investor. I have EMDs out on multiple properties, not just yours. So I can't just put a bunch of money down on yours. It adds up quick, and doing so may end up keeping me from another deal. If you want to work with me and get this done, I'd love to buy your property. And if not, that's okay too."
Money is valuable, and just because you're a "cash buyer" doesn't mean you can throw it around with no regard. Also, I personally never put a deposit down without a contingency period where I can get it back if need be.
Best of luck!
Brian,
Thanks for providing a rebutle. That is def a good way to negotiate the EMD!
- Wholesaler · Atlanta, GA · Member since 2015 · 32 posts · 4 votes10y
Originally posted by @Ash Patel:
I will go against the grain here on earnest money. My largest earnest money check was for $50k. It was on a bank owned commercial property that sat vacant for five years. Asking price was $500k and I offered $400k. The large earnest check was to get their attention and show that my offer was legit. It worked, kind of. The bank came back and said I had to close by the end of the year (three weeks away) or they get to keep my earnest money. I checked with my bank and title company and they were on board so I rolled the dice and got the property.
I typically write $10-20k earnest money checks to get the sellers attention. I have contingencies and the realtors hold the funds. I understand there is some risk but my opinion is that it is calculated and worth it. The large earnest money checks take the sting out of the low ball offers.
Ash,
I sef understand how a large EMD will stand out and prove serious. In your case I think it was absolutely appropriate, especially since you were the end buyer
- Wholesaler · Atlanta, GA · Member since 2015 · 32 posts · 4 votes10y
Originally posted by @Ash Patel:
I will go against the grain here on earnest money. My largest earnest money check was for $50k. It was on a bank owned commercial property that sat vacant for five years. Asking price was $500k and I offered $400k. The large earnest check was to get their attention and show that my offer was legit. It worked, kind of. The bank came back and said I had to close by the end of the year (three weeks away) or they get to keep my earnest money. I checked with my bank and title company and they were on board so I rolled the dice and got the property.
I typically write $10-20k earnest money checks to get the sellers attention. I have contingencies and the realtors hold the funds. I understand there is some risk but my opinion is that it is calculated and worth it. The large earnest money checks take the sting out of the low ball offers.
Also, in my case, the seller wasn't willing to negotiate on purchase price. So I can see why large EMD would work with lower offer. However, at full asking I think lower EMD would make more sense
- Wholesaler · Atlanta, GA · Member since 2015 · 32 posts · 4 votes10y
Originally posted by @Annette Hibbler:
I work as a full time Realtor in Southeast Michigan where rent ready investment property market is hot. I use many of the same practices for investors clients. Generally, if purchasing an income property under $100K, I would recommend $500 Refundable EMD. Anything $100K and over is $1000 refundable EMD. I always specify "refundable" to protect my clients interests. All EMDs are made out to my brokerage but for those not working with Realtors, I would recommend you make checks out to closing attorney escrow or to title agency only.
However, cash buyers can pluck down slightly more to place their offer on stronger footing. I just recently helped a cash buyer secure a $52K income property with Proof of Funds and $1000 EMD. I would never recommend an EMD higher than that because not only is it unnecessary and risky, as Ashley already pointed out.
Seller's only want proof of three things:
1. You have the money or access to it.
2. You're serious.
3. You have everything in place and intend to close in a reasonable amount of time.
There was also a mention of someone losing an EMD because deal closed one day after contract date, well you can easily protect yourself (and your clients) by having both parties sign an Addendum that would extend the date to close when you know there will be a delay.
I agree completely! Thank you
- Mojave, CA · Member since 2014 · 5 posts · 0 votes10y
Have you tried renegotiating with seller on EMD, give him your offer, maybe you can meet somewhere in the middle
- 10yRoy N.Pro MemberRental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
Originally posted by @Annette Hibbler:
....
However, cash buyers can pluck down slightly more to place their offer on stronger footing. I just recently helped a cash buyer secure a $52K income property with Proof of Funds and $1000 EMD. I would never recommend an EMD higher than that because not only is it unnecessary and risky, as Ashley already pointed out.
Annette:
An EMD of $1,000 - 2% in your example - offers the Vendor little assurance as it a moderately painless amount to forfeit. I am interested on why you see a more substantive EMD as unnecessary and risky? Unless you fail to perform as a buyer, your deposit is refunded {unless you agree to make a portion of it non-refundable}.
So as long as you enter into an agreement, particularly as a cash buyer, with the intention to perform then there is no increased risk with a larger EMD.
- Kansas City, MO · Member since 2015 · 8 posts · 1 vote10y
Hello Ashley,
My name is Gloudis Whiteside, I am a Wholesaler here in Kansas City, I am a newinvestor, but as far as I have seen 10% is pretty high. Most of the time the earnest
deposit is right around 1%-2%, but the real estate here in my city is not as expensive. If
your in ATL you should check out Rick Knight ( money talk with Rick Knight)
local radio show in your city on Fridays.
@Ashley LeBoeuf Your seller was probably jaded on a previous deal. I agree, if a large EMD is not going to benefit you at all, stick with the minimum. I like @Darrell Lee's advice. I have also sent the sellers Realtor a personal balance sheet, asset list or bank screen shot as further evidence that I am a qualified and serious buyer.
Good question and great responses!
- Wholesaler · Atlanta, GA · Member since 2015 · 32 posts · 4 votes10y
Originally posted by @Gloudis J. Whiteside:
Hello Ashley,
My name is Gloudis Whiteside, I am a Wholesaler here in Kansas City, I am a newinvestor, but as far as I have seen 10% is pretty high. Most of the time the earnest
deposit is right around 1%-2%, but the real estate here in my city is not as expensive. If
your in ATL you should check out Rick Knight ( money talk with Rick Knight)
local radio show in your city on Fridays.
Thank you! I will def check him out- any idea what station?
- Wholesaler · Atlanta, GA · Member since 2015 · 32 posts · 4 votes10y
Originally posted by @Roy N.:
Originally posted by @Annette Hibbler:
....
However, cash buyers can pluck down slightly more to place their offer on stronger footing. I just recently helped a cash buyer secure a $52K income property with Proof of Funds and $1000 EMD. I would never recommend an EMD higher than that because not only is it unnecessary and risky, as Ashley already pointed out.
Annette:
An EMD of $1,000 - 2% in your example - offers the Vendor little assurance as it a moderately painless amount to forfeit. I am interested on why you see a more substantive EMD as unnecessary and risky? Unless you fail to perform as a buyer, your deposit is refunded {unless you agree to make a portion of it non-refundable}.
So as long as you enter into an agreement, particularly as a cash buyer, with the intention to perform then there is no increased risk with a larger EMD.
In her defense and mine, I'm posing as the wholesale, not end buyer. Therefore, a larger EMD is a bit much. Also, I'm working on 3 properties from the same seller. That's 15k+ on EACH property! That's a bit much, especially if non refundable!
- 10yAdam BartomeoBusiness MemberReal Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
I have put down much more then 10% earnest and I have put down 0%. The only Reason I would put down anything is to show the seller that I am serious. Every time I put down a large sum for earnest my offer is accepted.
My last 2 accepted offers had $0 in earnest.
Bartomeo Property Management4.7150 Reviews - 10yRoy N.Pro MemberRental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
Ashley,
Your EMD should always be refundable unless you fail to perform your portion of the contract. Looking at it from the Vendor's perspective, if I am looking for a cash buyer, a 10% EMD is not unreasonable. Even if you are upfront and tell me your intention is to assign the contract to another party, I don't care provided someone performs on the contract and my EMD is assurance that I am not tying up the property for 60 - 90 days only to have it come-back to me.
As a wholesaler, I understand you have no intention of closing on the properties yourself, that is why I suggested above that you might consider a purchase option, rather than an agreement of purchase and sale. With an option, if you do not find a buyer, you are not forced to default or purchase the property yourself. {In fact, I would contend that whenever you enter into an agreement to purchase you should do so with the intention to close ... but that's another discussion}.
If these were my properties, I would discourage you from entering into an agreement of purchase and sale (APS), knowing you plan to wholesale them. If you insisted on the exclusiveness of using an APS, I would insist on a 10% EMD with half if it being non-refundable. As an alternative I would suggest selling you an option to purchase, with an option fee of, say 1%. This would give you the ability to find a buyer (you sell the buyer the option contract for 1.5%) without saddling you with the obligation to purchase the property if you do not find a buyer. The option contract could be exclusive, or I as the vendor, could have the right of cancellation {essentially, I buy back the contract and return your option fee} if I were to find a buyer myself.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes10y
The amount of EM is only one consideration.
Who is holding it and how many outs you have is key.
Is only 2,000 EM better than 8,000 when the seller is holding it and you have no outs? NO
Sellers could put a right to continued marketing clause in the contract so they are not tied to a buyer who wants to put little money down. I still wouldn't like that as multiple parties might put the property out at different prices and confuse the marketplace.
Not a fan of wholesalers posing as real buyers. If the property is a great deal you want to put up EM to show you are serious but as mentioned the seller does not hold it. Contractually or not the seller could blow through the money and you never see it again. Another question to get answered in writing is that the seller has no affiliation or ownership interest in the title company or attorneys office holding the EM.
- Wholesaler · Atlanta, GA · Member since 2015 · 32 posts · 4 votes10y
Originally posted by @Joel Owens:
The amount of EM is only one consideration.
Who is holding it and how many outs you have is key.
Is only 2,000 EM better than 8,000 when the seller is holding it and you have no outs? NO
Sellers could put a right to continued marketing clause in the contract so they are not tied to a buyer who wants to put little money down. I still wouldn't like that as multiple parties might put the property out at different prices and confuse the marketplace.
Not a fan of wholesalers posing as real buyers. If the property is a great deal you want to put up EM to show you are serious but as mentioned the seller does not hold it. Contractually or not the seller could blow through the money and you never see it again. Another question to get answered in writing is that the seller has no affiliation or ownership interest in the title company or attorneys office holding the EM.
You made some really great points! Thank you!
- Investor · Atlanta, GA · Member since 2014 · 415 posts · 299 votes10yAshley LeBoeuf Let me turn the tables. If you plan to Wholesale these properties, are you one of these Wholesalers that require a non-refundable $5,000 EMD, which seems to be the norm in Atlanta? If so, would you be opposed to offering the seller the exact same terms? If not, think hard about the "why not". Assuming the EMD goes to a reputable Escrow Agent, I've offered anywhere from a minimum $2,500 if I was making a full or close to full price offer all the way to a 100% if making a lowball offer. Either way, I also submit a POF so they know I'm serious and can close. party 100% EMD if I was offering what the Seller may believe to be a lowball or
- Investor · Tucson, AZ · Member since 2015 · 50 posts · 18 votes10y
I've seen varying amounts. In Arizona someone wanted $3k earnest for an $80k property, in Virginia I did a $135k deal with $100 deposit, I've done $0.00 for a $215k deal in Florida.
I would take the recommendations from the investors in your market. But I would caution from overtly high earnest deposits. Read the contract. Make damn sure the deposit is NOT non-refundable. If that's the case, run, because even if there's a title defect; the courts have determined non-refundable means just that. No matter what happens you earnest deposit is gone. Buyer beware.
- Wholesaler · Atlanta, GA · Member since 2015 · 32 posts · 4 votes10y
Originally posted by @Josh Nicolson:
I've seen varying amounts. In Arizona someone wanted $3k earnest for an $80k property, in Virginia I did a $135k deal with $100 deposit, I've done $0.00 for a $215k deal in Florida.
I would take the recommendations from the investors in your market. But I would caution from overtly high earnest deposits. Read the contract. Make damn sure the deposit is NOT non-refundable. If that's the case, run, because even if there's a title defect; the courts have determined non-refundable means just that. No matter what happens you earnest deposit is gone. Buyer beware.
Thank you!
- 10yRoy N.Pro MemberRental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
Originally posted by @Josh Nicolson:
I've seen varying amounts. In Arizona someone wanted $3k earnest for an $80k property, in Virginia I did a $135k deal with $100 deposit, I've done $0.00 for a $215k deal in Florida.
I would take the recommendations from the investors in your market. But I would caution from overtly high earnest deposits. Read the contract. Make damn sure the deposit is NOT non-refundable. If that's the case, run, because even if there's a title defect; the courts have determined non-refundable means just that. No matter what happens you earnest deposit is gone. Buyer beware.
Interesting. Things must be different there. In any Agreement of Purchase and Sale we have ever used, the Vendor has an obligation to deliver the property with clear title - free of defect or encumbrance. If a problem with title is discovered during diligence, it is for the Vendor to cure. If the Vendor cannot, or will not, it is the Vendor who has failed to perform and the buyers deposit is refunded.
If the title defect is missed during diligence and discovered after Close, that is the reason title insurance exists.
As others have indicated, the amount of deposit is negotiable, but the threshold is ultimately is decided by the Vendor. At that point your decision is simple: pay and play or move on.
- Dallas, TX · Member since 2015 · 38 posts · 6 votes10y
Regardless of what the earnest money amount make sure you have a way to get it back in the event you decide not purchase. Ask for a time period to inspect the property and during that time ensure your lender will fund the money. If all checks out then you close if not you get your earnest money back and on to the next one. You want to make sure the seller has properly disclosed everything to you so make sure you get a sellers disclosure of some kind from him/her. I know in most cash/wholesale deals they do not allow an inspection period after contract you have to do all of your inspecting as much as you can before submitting the contract.
- Kansas City, MO · Member since 2015 · 8 posts · 1 vote10y
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