All Cash Purchase Requires 10% Earnest Money Deposit?

Question

Hello everyone,

I've got a great opportunity to purchase a rehab house at 50% ARV, and have already been preapproved by a great hard money lender that'll front money for purchase and rehab up to 75% LTV. Everything seems ready to go. I've talked to the agent in charge of the property, and told her I'd like to make an offer on the property. Since I'm working with a HM lender, it'll be an all cash purchase.

Now, the issue is this: she states that if I'm purchasing the property through conventional financing, that my earnest money deposit is roughly 1% or so, as expected. But since I'm paying cash, that it'll likely be around the 10% mark (which kind of blows my mind). In other words, I need to send in a check for $8k, in order to make an offer for the house.

Why is this so? Is this normal? And why would the bank not be doing everything possible (like a lower earnest deposit) to have their property purchased via cash, intstead of financing?

Any help would be greatly appreciated. I need to get the offer in soon, as it's getting looked at very frequently (I'm sure many of you know the pressure).

Thanks again,

Vic

Ryan Webber · Answer

Well Raging, the actual procedures and terms will be probably be different in your state, but in Texas its referred to as Third Party Financing (meaning you are getting a loan). If you are getting an HML then technically you are getting a loan. HML's are financing. Now they aren't conventional financing, and they don't require all the other things a normal lender does, but they are still financing. Most HML's will tell you just to show it as a cash offer, but in making an offer on an REO (a bank owned property) the lender will require that 10% down. So I would just show it as an offer with financing, but have no contingency in there for your financing.

See when you make an offer with financing there is normally a contingency in there for the buyer that if they can't get the loan then the contract is canceled. A financing contingency is an extremely common contingency and is in just about every contract except a cash offer. Now technically you can make the contract have the same weight by not putting in a financing contingency, even though you are getting financing through an HML. Now what that means is that if your HML pulls out and you can't get a loan, you are still liable to fulfill that contract. The contract is not contingent upon you getting a loan. Legally, you have to fulfill the contract whether you get a loan or not.

Technically, your contract with financing, but no contingency for financing, has all the weight of a cash offer.

Either way, Vic, if you don't hurry and get your offer in there, you're going to lose it if you haven't already. :D

N/A N/A · Answer

Thank you all, and Ryan! I appreciate the clarification. I did end up calling the private lender, and you hit it right on the head - they said it's best to reference it as third-party financing for cases like that. And so I did. I had the contract modified, and then sent the lowball offer off, hoping it'll reach the decision maker on one of his good days... ;)

Thanks again. Let's see where it goes from here.

Take care,

Vic

Thanks again. Let's see where it goes from here.

Take care,

Vic

Frank Adams · Answer

I've purchased close to 40 houses for cash, and I've NEVER given more than $1K earnest money. However, you're not buying for cash, you're buying with third party financing, it just doesn't have an inspection/appraisal contingency.

all cash

Tom C · Answer

From my experince which isn't a whole lot, as long as you have a preapproval letter earnest money should never be a requirement, unless you are buying from HUD, then 500 to 1000 is required down when you bid is submitted.

I'd give the preapproval letter, a five dollar bill and a signed contract.

Ryan Webber · Answer

I'm not sure why they require that, but I would guess that there are lot of investors that claim it is a cash offer but don't ever bring it to the table.

Technically your offer is not a cash offer, so I would get an approval letter from the HML and put in a contract stating third party financing with no financing contingency.

N/A N/A · Answer

Thank you for your reply, Ryan. Would you mind taking a second to explain it in more detail please (for a dense person like myself)? Especially this part:

"put in a contract stating third party financing with no financing contingency."

Can I pass off a HM loan as financing, rather than a cash purchase? Also, would banks still be willing to sell based on financing (I was always under the assumption that they wanted cash only more often than not).

If I can call it financing, technically, than that'll definitely help me.

Thanks again for your help,

Vic

All Cash Purchase Requires 10% Earnest Money Deposit?

All Cash Purchase Requires 10% Earnest Money Deposit?

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