How To Keep Earnest Money?

Question

Hello BP!

My partners and I flip houses here in Charleston, WV. We flip between 45 and 50 houses per year and have done so for the last 3 1/2 years. We recently ran into a little streak of houses falling out of a contract just before closing. Some of them are earlier in the process due to being scared of inspections. (First time home buyers).

We stopped taking earnest money about 2 years ago because it seemed like the buyer could ALWAYS get their money back. We understand if financing falls through but if you are just changing your mind a week before, that's a different story.

With the recent fallouts, I was wondering if there was a workaround to this. Maybe we don't even call it earnest money but we call it "holding money" to hold their spot to buy the house? Maybe even a completely separate contract?

We are just trying to avoid buyers from wasting our time. If they hold a house up for 30-45 days, it costs us money more money but they walk away scotch free. Even $1000 or $2000 dollars could help us without holding costs in the event they do back out.

Maybe I should just mark it up as the price of doing business but it is frustrating. Thoughts?

Joe Splitrock · Answer

@Jon Schoeller you may be legally entitled to the money, but I think your policy of returning it is better. I say that because you have a sizable flipping business. Your reputation is very important when you are operating in scale. Bad word of mouth travels fast. You start taking $1000 from first time home buyers and before you know it, they are bashing your company all over social media. Just not worth it, but I feel your pain.

Darius Ogloza · Answer

The solution it seems to me is to negotiate tighter inspection windows so that you are not hanging out for a month or 45 days.  The buyer cannot simply "change his or her mind" when the contract is properly written.  The EMD return must be tied to a specific contingency not occurring.

Jon Schoeller · Answer

Agreed. I guess it only happens a few times a year. It just seems like we have had a bad streak lately. It also stings because that can be a 20k to 100k swing in planned income if a couple of contracts drop out. Of course in this business, we learned not to count our chickens before they hatch.

Jon Schoeller · Answer

Yeah, I guess it's that fine line of fighting for our money and keeping our reputation. I guess we can't have our cake and eat it too. I just wish there was a way to be upfront and be like "We accept your offer with a 1000 dollar non-refundable deposit" lol. Appreciate your feedback.

Darius Ogloza · Answer

I would try to be a little tougher on the buyers who want to walk.  The money is deposited to protect you.  Unless there is an appraisal contingency, once the inspection period closes the only valid walk-way (under most agreements) is failure to find financing on terms disclosed in the purchase agreement.  It sound to me like you may want to pound the table a little more next time someone wants to walk away for no good reason.  Can't hurt.

Jon Schoeller · Answer

I agree and we have tried that but we are in an area that operates a little slower than most. Inspections average about 14 days and now with COVID, longer. I am fine with the buyers being protected but I think the seller should have some as well. We all know that buyers can pretty much claim any reason to get out of a contract at any time. As the seller, it's hard to prove that they just changed their mind. I am just trying to protect our company as well.

How To Keep Earnest Money?

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