Atlanta, GA · Member since 2017 · 70 posts · 16 votes
I am trying to understand the earnest money technicalities. Have a novice question here, bear with me.
If you are making a $125k earnest money deposit on a lets say 5.5 million dollar deal.
I have been told, it will be applied to closing costs as credit.
Lets say for a 20% down, you come up with close to $1,350,000 cash (included 4% closing costs).
If you gave away $125k as earnest money out of the 1.35 million cash, do you have to come up with additional $125k to make up the difference?
Because I can't imagine there is going to be $125k closing costs.
Or do you ask the seller to give back the difference at closing. Because, I don't want to be losing actual $125k hard cash, I'd rather have the bank pay that and I pay 20% of it.
Rental Property Investor · Miami, FL · Member since 2015 · 179 posts · 292 votes
7y
The earnest money is wired when you execute the PSA. (These days we have part of that earnest money go “hard” or non-refundable on day one or after hitting certain hurdles of the due diligence process.)
When it’s time to close you come to the closing table with your downpayment minus the amount you already put up as earnest money. (If you raised capital from investors then what is common practice is that you come to the closing table with the downpayment plus any additional capital raised for renovations and reserves, and out of that money you pay yourself back the earnest money amount and other out of pocket expenses you incurred to bring the deal to closing)
Rental Property Investor · Tampa, FL · Member since 2015 · 1k+ posts · 969 votes
7y
The purpose of the earnest deposit is to prove you intentions to close with the seller. The earnest deposit is applied to your down payment. So, if the total down payment for the loan is $1.35 million and the earnest deposit is $125k, you will need to bring an additional $1.225 million to the closing table.
Neither the earnest deposit nor the down payment for the loan covers the closing costs. Those paid for separately. Sometimes they are paid by the seller (they come out of their proceeds) or by the buyer (out-of-pocket). It depends on where terms in the contract.
Rental Property Investor · Miami, FL · Member since 2015 · 179 posts · 292 votes
7y
The earnest money is wired when you execute the PSA. (These days we have part of that earnest money go “hard” or non-refundable on day one or after hitting certain hurdles of the due diligence process.)
When it’s time to close you come to the closing table with your downpayment minus the amount you already put up as earnest money. (If you raised capital from investors then what is common practice is that you come to the closing table with the downpayment plus any additional capital raised for renovations and reserves, and out of that money you pay yourself back the earnest money amount and other out of pocket expenses you incurred to bring the deal to closing)
Rental Property Investor · Glen Rock, NJ · Member since 2015 · 3k+ posts · 2k+ votes
7y
@Sanjoy V. I second what @Theo Hicks and @Lennon Lee stated. So be sure this is the deal you're definitely interested in pursuing because the so-called "Hard" money deposit will be non-refundable regardless whether you'll pursue the deal or not at the end of the day. If you do continue with the deal then the deposit will be applied towards the overall down-payment+closing costs+reno costs.