How much earnest money to put down on a p&s agreement?

39 Replies

(Wholesaling question)

When crafting a purchase & sale agreement with the seller, how much of an EM deposit is customary to put down in order to tie the property up so you can flip it to the end buyer? Also, if you're unable to find a buyer during a 30-day period, how do you approach the situation with the seller that has already agreed to sell you their property? Thanks in advance.

I don't know about everyone else but I generally only put 1k down for earnest money on anything I am trying to wholesale. If i'm unable to find a buyer within the 30 days period I go to the title company and purchase the property like I told the seller I was going to. If you say you are going to close within 30 days then close within 30 days! Tell the seller you are going to sell to a 3rd party they might be open to you helping market for a lower fee and faster closing than with a realtor. If your asking how to weasel your way out of the deal I don't have any experience with that sorry.......

Yeah the gurus will tell you to do 10 bucks or something but most sellers won’t go for that nowadays. On my normal purchases I’ve done 1-2k

It’s deeper than that.

Consider earnest money PLUS default terms.

Sorry, but I’m not contracting with someone putting $10 on the line unless it’s a petty sports bet.

Originally posted by @Caleb Heimsoth :

Yeah the gurus will tell you to do 10 bucks or something but most sellers won’t go for that nowadays. On my normal purchases I’ve done 1-2k

 So if you don't find a buyer to agree to purchase the contract then you purchase it on your own? I live in the DC area so I don't know how feasible that is 

Originally posted by @Daniel Pitta :

 So if you don't find a buyer to agree to purchase the contract then you purchase it on your own? I live in the DC area so I don't know how feasible that is 

It's not acceptable to put a property under contract when you cannot afford to honor the contract.

You don't know how feasible that is to contractually and morally do exactly what you told the seller you were going to do? This is exactly why a lot of people don't trust real estate investors, because people will sit down at some grandma's table and try to get her property under contract with a sheet full of lies. At a very discounted price to put it very mildly. Then having made there sheet full of lies not even fulfill the one part they legally signed and said they were going to? Move to a different market where you can afford to then, don't try and build a business around deceit and taking advantage of people. Your seller may have had only 30 days before they lost the house they were desperate and needed help, if you back out last minute they might lose what little they had left. 

@Daniel Pitta -  we work with hard money lenders when there are situations when we don’t have 100% cash to close.  Like @Philip Williams we always close on homes we put under contract.  Not only is it the right thing to do, knowing that keeps us focused on deals that we know are good buys. 

Originally posted by @Sam Wilson :

@Daniel Pitta -  we work with hard money lenders when there are situations when we don’t have 100% cash to close.  Like @Philip Williams we always close on homes we put under contract.  Not only is it the right thing to do, knowing that keeps us focused on deals that we know are good buys. We get lots of leads in Memphis so this forces us to be selective.  Good for us, our investors and the sellers. 

 I'm new to wholesaling and trying to understand the process, which is why I asked. I was under the impression that many investors start their careers with wholesaling because it requires little capital, however I live in the DC area where it's almost impossible to find cheap properties, whether they're distressed or not. This is why I posed the question; from everything I've read it sounds like the goal is to flip the contract as quickly as possible with the least amount of liability. But in my market I'm not going to last long if I'm actually purchasing every property I can't flip the contract on within 30 days.

I'm not trying to 'scam' people; I'm trying to understand how the process works since I've been researching. I don't want to back on my word and terminate the contract if I can't find an end buyer. I should've asked this in the local DC/VA forum.

@Daniel Pitta -  totally understand.  Unfortunately there is a strong myth that you can wholesale with little or no money and maybe folks out there can.  We spend thousand every month just are marketing much less holding costs.

Maybe you’d be better of finding investors who will pay you a birddog fee rather than wholesaling.  

There are lots of people promoting deceit and dishonesty in the "wholesaling" space. Ignore those types. If you want to make real money buy and hold. Consider getting your license. "wholesaling" is often promoted as get rich quick schemes. Most of them are gone within a few months because they found out it is difficult, takes money, time, etc. Besides that fact, in many if not most states it is not legal to advertise properties you do not own unless licensed. 

SINCE ITS "ILLEGAL" To advertise property's you do not own unless you're licensed, That's Why you put it under Contract So you GAIN Equitable Rights TO the Property that Allows you To NOW Market The Property Because You Are Essentially The buyer, BUUUUUUTTT YOU'RE not marketing the House To ANYONE , in the end your actually marketing the contract the rights to the house to a cash buyer investor (Assignment) then he steps in your shoes which is clearly on the purchase and sales agreement that the seller signed and basically buys the house now,

Originally posted by @Ozzy Jimenez :

SINCE ITS "ILLEGAL" To advertise property's you do not own unless you're licensed, That's Why you put it under Contract So you GAIN Equitable Rights TO the Property that Allows you To NOW Market The Property Because You Are Essentially The buyer, BUUUUUUTTT YOU'RE not marketing the House To ANYONE , in the end your actually marketing the contract the rights to the house to a cash buyer investor (Assignment) then he steps in your shoes which is clearly on the purchase and sales agreement that the seller signed and basically buys the house now,

 Not necessarily truel FL does not allow people to use contracts to circumvent licensing law even if you have a contract to purchase. You are bringing an END BUYER which is a BROKERAGE activity in this state. 

Originally posted by @John Thedford :
Originally posted by @Ozzy Jimenez:

SINCE ITS "ILLEGAL" To advertise property's you do not own unless you're licensed, That's Why you put it under Contract So you GAIN Equitable Rights TO the Property that Allows you To NOW Market The Property Because You Are Essentially The buyer, BUUUUUUTTT YOU'RE not marketing the House To ANYONE , in the end your actually marketing the contract the rights to the house to a cash buyer investor (Assignment) then he steps in your shoes which is clearly on the purchase and sales agreement that the seller signed and basically buys the house now,

 Not necessarily truel FL does not allow people to use contracts to circumvent licensing law even if you have a contract to purchase. You are bringing an END BUYER which is a BROKERAGE activity in this state. 

this is ABSOLUTLY not true in Oregon either and CA has some rules.. I have seen that equitable interest arguemnt for years. 

the facts are you have a scheme the scheme is market put up minimum EM  with no intention of closing.. then blast your contracts out to your list or on craigslist or on BP or what have you.. now getting caught is another matter all together.. OHIO FLA  OREGON are tough states for this.. some states do not care just depends on where your at.

I think the bigger issue for the OP is his area of DC is red HOT and the REALITY of getting someone to sell someone a home that does not have POF and bank letters etc is going to be slim and none.. you need to work the rough areas of DC to make that happen.. those are where wholesaling works best or in any low value asset market that is not covered by the real estate community becasue the value of the assets are so low commission income is not worth their time.. thats not to say you can't stumble into a deal you can.. but those that do wholesaling and actually make money when you talk to them they are spending 5 to 10k a month on marketing.. and you need to risk that for the first year with no guarantee your going to close anything.. would you do that would U pop out 5 to 10k a month on the come?.

Originally posted by @Ozzy Jimenez :

SINCE ITS "ILLEGAL" To advertise property's you do not own unless you're licensed, That's Why you put it under Contract So you GAIN Equitable Rights TO the Property that Allows you To NOW Market The Property Because You Are Essentially The buyer, BUUUUUUTTT YOU'RE not marketing the House To ANYONE , in the end your actually marketing the contract the rights to the house to a cash buyer investor (Assignment) then he steps in your shoes which is clearly on the purchase and sales agreement that the seller signed and basically buys the house now,

 That's exactly what I meant..but I'm wondering what you all do in the event that you can't find an end buyer for any number of reasons. Do you just forfeit the earnest money deposit and leave it at that? Or do you actually try to purchase the property. I live in one of the most expensive areas in the country so I want to make sure I have all my ducks in a row before I get out there and try wholesaling in case Murphy's Law comes to fruition.

Originally posted by @Jay Hinrichs :
Originally posted by @John Thedford:
Originally posted by @Ozzy Jimenez:

SINCE ITS "ILLEGAL" To advertise property's you do not own unless you're licensed, That's Why you put it under Contract So you GAIN Equitable Rights TO the Property that Allows you To NOW Market The Property Because You Are Essentially The buyer, BUUUUUUTTT YOU'RE not marketing the House To ANYONE , in the end your actually marketing the contract the rights to the house to a cash buyer investor (Assignment) then he steps in your shoes which is clearly on the purchase and sales agreement that the seller signed and basically buys the house now,

 Not necessarily truel FL does not allow people to use contracts to circumvent licensing law even if you have a contract to purchase. You are bringing an END BUYER which is a BROKERAGE activity in this state. 

this is ABSOLUTLY not true in Oregon either and CA has some rules.. I have seen that equitable interest arguemnt for years. 

the facts are you have a scheme the scheme is market put up minimum EM  with no intention of closing.. then blast your contracts out to your list or on craigslist or on BP or what have you.. now getting caught is another matter all together.. OHIO FLA  OREGON are tough states for this.. some states do not care just depends on where your at.

I think the bigger issue for the OP is his area of DC is red HOT and the REALITY of getting someone to sell someone a home that does not have POF and bank letters etc is going to be slim and none.. you need to work the rough areas of DC to make that happen.. those are where wholesaling works best or in any low value asset market that is not covered by the real estate community becasue the value of the assets are so low commission income is not worth their time.. thats not to say you can't stumble into a deal you can.. but those that do wholesaling and actually make money when you talk to them they are spending 5 to 10k a month on marketing.. and you need to risk that for the first year with no guarantee your going to close anything.. would you do that would U pop out 5 to 10k a month on the come?.

 Lol the more I think about doing this the more it seems like a bad idea. I'm not trying to burn through my savings marketing for my company and get nothing in return. But buy and hold investing here seems just as difficult given housing costs in the area. Maybe I'll have to relocate to pursue a real estate career.

Whether I intend on flipping the property or wholesaling I usually put 1k as EMD. Like some here have said, something like $10 won't usually work but it's negotiable.

In regards to your second question, It's pretty simple to me. Be clear and disclose up front that you need some time to find an investor who will provide funding and that you yourself don't have all the cash.....a finance contingency. People use it all the time because not all of us have 300k sitting around. Just don't make it a 30 day contingency, 10 days should be enough time for you to know if you'll have a buyer or not. This is also when you would do any inspections (termite, roof, etc). 

If you back out after that contingency period, then you lose your EMD. That's the point of an EMD.

Originally posted by @Pratik P. :

Whether I intend on flipping the property or wholesaling I usually put 1k as EMD. Like some here have said, something like $10 won't usually work but it's negotiable.

In regards to your second question, It's pretty simple to me. Be clear and disclose up front that you need some time to find an investor who will provide funding and that you yourself don't have all the cash.....a finance contingency. People use it all the time because not all of us have 300k sitting around. Just don't make it a 30 day contingency, 10 days should be enough time for you to know if you'll have a buyer or not. This is also when you would do any inspections (termite, roof, etc). 

If you back out after that contingency period, then you lose your EMD. That's the point of an EMD.

 Ok perfect, that's the response I was looking for thanks. I just wanted to make sure there isn't any kind of legal issue if I'm unable to find a buyer and don't want to deceive anybody. Not sure why my question received so much vitriol; maybe I should've worded it differently lol...

Either way, signing contracts with no intention of purchasing is FRAUD. Note the guys that say to close no matter what. That is the moral thing to do. 

@Daniel Pitta There are good deals here in the DC area, it just depends on what you're trying to buy and your hold or exit strategy. First off I'll say getting a good deal is going to be hard work and you'll need to know what you're doing, not guessing but know what you're looking at and evaluating and already have a clear concise strategy ready to go. I purchased an REO from Bank of America several months back near the Rhode Island metro station (Red Line) I knew it was priced slightly below value based on my research, Comps, and ARV, so I offered list price, I did this knowing most people will low-ball an REO price no matter what the price is because that's what the Guru's, Podcast, and online forums said you're supposed to do with REO's because they said so, This property appraised $25K above what I paid, I spent another $16K having a contractor do some minor rehab on the property (all cosmetic). Two of the same model/plan have sold for $124,000 above what I paid, and a third property is on the market for $125,000 above what I paid. There's opportunity in DC!

@Daniel Pitta Well like with anything, there are right ways to do things and wrong ways. The wrongs will get a lot more attention on here. I blame the gurus who promote that stuff. If wholesaling is what you want to do, find someone in your market who is doing it consistently and learn from them. Jay was right though, don't expect instant results. Wholesaling requires a lot of time/money to accomplish.