Earnest Money on a Commercial Real Estate Deal

23 Replies

What is the normal percent of earnest money deposit on a commercial deal? Agreed offer is $900K and the seller sent their own contract asking for 15% intial deposit for the Title company escrow instead of returning the letter of intent.

15% is high IMHO...

I usually try to get 5% from my buyers, but I usually put down less than that when buying personally...

15% sounds high to me too. Do you have a financing contingency in your contract? When does the earnest money go hard?

30 day due diligence then it becomes non-refundable. Pretty open during the diligence period for rejection. 30 days after diligence to close with 2, 30 day extension options with an additional $5K deposit. Financing is close to done. Dealing with an out of state assett management company for a large bank. Took a long time for "ownership" to decide if they wanted to sell and they accepted our first offer.

I guess it really depends on how good the deal is and how much leverage you think they have with potential other bids.

Do you have some numbers you can post? What type of product is it? Where?

As the others say, 15% is high, but might be worth it. Or you can try 5-10% and see how they respond. I've put up 10% before, was nervous, but there was never mich risk to the EMD, so it was fine.

Working with Real Estate attorney on it now. Multiple problems with contract. Seller wants to close by mail with a title company in DC. Weird deed set up, very high insurance requirements and such.
Several deals in it our lender won't approve and such. Lawyer rewriting contract to work in Texas with a title company that has an office here and such. Bring EM down to 5% or so. Bunch of changes.
We will see how it goes.

So you're countering with 5% or they have already agreed to it?

Counter. I am willing to go up with it as long as I feel good about it. The contract in whole was very favorable for the seller.

Well the assett management company rejected the standard Texas Association of Realtors commercial contract we sent in. They still want a large earnest money deposit held by a title company in DC with some impossible closing terms. I want to buy, they want to sell, we agree on the price, just contract BS getting in the way. Several items in their contract our bank has already said no to. Guess my attorney and theirs need to chat and bill a bunch hours to come up with something that works.

Ugh...sorry about that.

What could they possibly have to object to the the TAR contract?

Finally got it under contract. 7.5% EM, 60 day due dilligence period. No finance contingency. Courtesy closing in my area. Had to use their contract. Marked up everything we did not like and it went back and forth a couple of weeks. Ended up more or less dealing with the assett manager's council directly to get it worked out. Kind of funny all the brokers, assett managers, bankers, and stuff CC'd on emails with very little input from them.
Start ordering appraisals, inspections and such tomorrow.

Are you using financing to purchase the property?

Yes, It is all set up as long as it appraises. Should not be a problem, getting a pretty good deal. We work with this bank often.

Moving along well. The place appraised for 30% more than the agreed price. I had an extra $50K built in to the SBA loan for improvements.
The bank is now telling me I can use any expense during this as part of my equity injection? Legal fees, SBA loan fees, surveys, inspections and such. Anybody heard of that?
The deal is $850K, the loan is $900K with 10% down for equity injection. Already ponied up $63,750 in earnest money. The complex appraised at $1.15M. I have not figured out if using the $15K in expenses as part of the equity injection is a plus or not.

John--
I think the bank allowing you to use your $15K as equity is a plus. I used to be a commercial underwriter and typically when we said that, that meant that the borrower was allowed to use any out-of-pocket expense towards their equity injection. So if you are required to put in $90K total, already put up $63K for EMD, and $15K for expenses, you would only need to bring $12K to closing.

Just how importany are the estoppel certificates?
Evidently the property managment company is having a great deal of trouble getting one of the tenants to sign. There are 2 tenants. Both with completly different leases. One a standard lease and the other drawn up by an attorney. 1 is paying CAM plus T&I. The other just base rent. Base rent is the same for both. Both have a clause about signing estoppels which is well past due.
That and the 2 tenants seem to have some kind of ongoing issue with each other. Once we have it the project will become 76% occupied.
(Each tenant has 12% of the project. Our business will be in 52%)
I can see why the bank wants this property off the books. The management company has the leases all screwed up, has been billing them pretty hard, and it's been 76% vacant for quite some time.

@Bryan Hancock

Can you respond to his questions about Estoppel Certs? I am learning as you guys are talking. Thanks.

The estoppel certificate is a document giving a prospective buyer the terms and conditions of an existing lease, the rights of tenants. It is signed by the tenant and landlord to acknowledge and disclose such rights. This is of interest to the lender to ensure there are no side deals putting the tenant in a psoition to disclose. Reducing all agreements to writing.

You'll find you'll have other expenses in that SBA, bond underwriting, could have bank's attorney fees, etc. so I wouldn't say you should be banking on much left. Don't know your lender but if there is money available they will consume it. We closed on a very similar deal in the DFW area last year. It took almost 4 months! Good luck!

This management company for the seller is driving us insane. The day before closing the revenue abstract shows the prorated rent for the reminder of the month being consumed by back rent owed by one tenant. This is after we finally recieved estoppels that showed both leases in good standing a week ago!!!
This is not the first time the their numbers have not made any sense.
Sent a few blistering emails late in the day and plan a few more in the morning. Hate to blow up the deal over $2K, just feel like getting screwed around with.

Finally closed. Ended up getting half of the back due rent. Got hosed for a grand. We will see how the tenants want to act on the first of the month.
At least we now have a much bigger home for our primary business along with a 12,000 square foot building that is 50% leased and have someone interested in the other half.
Thanks Bigger Pockets.

Congrats on getting this done, John!

Can you share details on the mortgage?

It was an SBA loan. The whole note is for $900K. $850K purchase price, $50K for improvements. 50% carried by a Texas bank, 15 year at 5.5% fixed. 40% carried by SBA 5.5% fixed, 20 year. 10% equity injection on our part. We will probably spend the $50K and another $50K out of pocket for the remodel and improvements. The place appraised for $1.1 as is and $1.2 after improvements.
Much of that will be equipment for our primary business to function well. Things like overhead cranes and a paint booth.
We may do a few capital improvements to the complex to raise the values (and rents) on the 12,000 feet of rental units.
It has 1 building that is 13,500 sq ft that we will occupy and a 12,000 sq ft building separated into 3 units that is 50% leased.

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