Why I never put earnest money down

Question

I never put earnest money down. Not $500, not $1,000, not on any deal.

That is not me being difficult. It is math and volume. I am looking at deals every week in Memphis, mostly single-family under $100K that I plan to BRRRR. If I tied up cash on every contract that might close, I would have thousands sitting dead while title, walkthroughs, and seller situations sort themselves out. A lot of those deals never close — and it is rarely because I walked.

My protection is not earnest money. My protection is speed and certainty on the ones that are real. I underwrite fast, I give a clean price, I can close, and I do not retrade on small stuff. Wholesalers and sellers who work with me more than once learn that. The first deal is where I have to explain it the most.

I also read every contract before I sign and strike the earnest money line if it is in there. If a seller absolutely will not move without it, I listen — but in 236 doors, that has almost never been the thing that made a good deal close. What closes deals is a real buyer who answers the phone and shows up at closing.

Newer investors: do not copy this blind if your market expects it and you have no track record yet. Earn your reputation first, then your terms get better.

Curious how others handle this — do you put earnest money down on off-market single-family deals, or do you hold the same line?

Henry Lazerow · Answer

In my market a $0 deposit will just get the person laughed at and their offer not taken seriously, it would be a losing strategy for the buyer. Earnest is not a big deal and very easy to get back. I put as much down as a seller wants with no worry, it just shows some commitment.

Simon W. · Answer

I'd add how it looks on the books, because the deposit isn't a cost until something goes wrong. When you put down $1,000, it's a deposit sitting in escrow, not an expense. If the deal closes, it's just part of what you paid and goes into the property's basis. If it's refundable under the contingency, like Matthew describes, it comes back and never hits your income.

The number to watch is how much is tied up at once. Twelve open contracts at $1,000 is $12,000 you can't use, which is the point about cash sitting dead. If you do put money down, I'd keep a list of open deposits with the date each one gets released.

The costs of deals that die, like inspection and appraisal fees, are separate. They aren't part of any property's basis because you never owned it, so I'd track them in one bucket for deals that didn't close and ask your CPA how they're treated. It shows what finding deals actually costs you, which is a more useful number than the deposit.

Matthew Morrow · Answer

@James Jones that can work off-market when the seller knows you close. On listed properties in eastern PA it's a tougher sell. Most listing agents expect a deposit, and a $0 offer usually lands at the bottom of the pile next to one with real money behind it. I'd rather put down a modest deposit with a solid inspection contingency than lose the deal over it. Every market is different, but that's how I'd approach it here.

Nicholas L. · Answer

@James Jones

not sure if this will work elsewhere... i buy both on and off market and always put EMD down. not sure how i wouldn't...

James Jones · Answer

Good question, Jamie — trust does not come from the deposit, it comes from what you do after you sign. I underwrite fast and come back with one clean price, and I do not retrade over small stuff once we agree. If I say I will close, I answer the phone, I show up, and I close. The wholesalers and sellers I work with in Memphis have seen that pattern repeat, so the earnest money conversation gets shorter every deal. The first deal is the hardest one to explain — after that, the track record talks. At 236 properties, mostly under $100K, my reputation is the deposit.

Jamie Parker · Answer

Ive made that point to sellers and realtors before. if you are making a lot of offers, Putting up 500-2500$ adds up. Now one once you are certain, then it makes sense. But ultimately EMD doesn't guarantee that someone will close either.

As A wholesaler, getting an EMD on a deal from a buyer doesnt guarantee a close. Most investors write an exit clause into agreements.

My question, How do you gain trust when not providing a EMD?

John Leland · Answer

We follow the same pattern. I believe earnest money is for the situations where you will buy only one property, live in the property, it's a hot market and a great deal. On investment properties our speed and ability to close removes the need for earnest money,

Why I never put earnest money down

Why I never put earnest money down

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