Bypassing the Earnest Money Deposit

Real Estate Investor · Los Angeles, CA · Member since 2010 · 59 posts · 5 votes

Hi Guys,

What are the best ways that I can bypass submitting cash dollars and etc. for the Earnest Money Deposit suggested by a realtor in order for my offer to be seriously considered?

Many Thanx

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Curt DavisBusiness Member

Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes

15y

Most people want to avoid putting down EM b/c they are broke or new to investing. This will never fly if your trying to buy bank REO;s. Now you can get away with it if your dealing with distressed owners. Tell them you will put down $100 in EM but it will be held with your closing company.

Good luck

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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
15y
Depends on who the seller is and what they have instructed the listing agent to accept. I have used earnest money notes many times, but it's easier to do that if the Realtors know you, or have heard of you, if you have a reputation of closing deals you make. Most standard contracts have a box of EMN. A deposit can also be made after the contract is accepted. Doubt any bank will be accepting a note like this, but a motivated seller might.

Consider what the EM is used for, to cover the costs of default. If a buyer had a loan approved and just got cold feet, a Realtor might want a commission, since they did what they contracted to do, so the Realtor has an interest in what the EM might be. If you can sell the Realtors, you might get by with a note. Good luck....
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Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
I hope you get some good answers here, but my suspicion is that you won't. The seller rightfully wants you to have skin in the game if they are going to take their property off of the market.

I think the best you can likely do if there is blowback on the earnest money is to ask for contingencies to get your money back. Contracts are generally tilted toward the buyer anyway.

Preliminary Ideas:

1. Financing contingency....Lot's of creative ways to keep your money from being at risk...like a "free look" period where the money isn't hard

2. Escape clauses in the contract

3. Inspections

Is putting some money down an option? Who is picking the title company? Many don't worry about the title company, but I seldom do deals outside of my title company because I have a relationship with them and they are not likely to "misinterpret" me getting my earnest money back in the event I need to exit for some valid reason.
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Todd Brittingham
Real Estate Investor · Walled Lake, MI · Member since 2010 · 121 posts · 66 votes
15y
What is your incentive to bypass the EMD? As Bryan mentioned most sellers are going to want you to have some skin in the game, and you can actually use the EMD to your advantage to make your offer look stronger. Any offer that has a low/no EMD with lots of contingencies might not even get a look from a seller, where as a high EMD with no contingencies may get accepted even if multiple offers are present.
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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
15y
I don't see earnest money as "skin in the game" it's not a down payment until the contingencies have been met. At the time the contract is presented, an EM deposit is only demonstrating good faith, that the buyer will follow through with the offer, subject to the contingencies, like successful inspections. The "skin" comes off later, after the borrower can't walk on the deal. It is only there to cover or indemnify expenses of the seller that arise due to the lack of performance by nthe buyer prior to closing. At closing, the deposit is credited to the buyer and reduces amounts due.

You can eliminate the use of cash for an earnest money deposit by providing a note or even agreement to hold a draft (which is done, but is ofetn illegal under state law). I have been involved in trades where no EM was required since other assets were being exchanged.
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Curt DavisBusiness Member
Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
15y
Most people want to avoid putting down EM b/c they are broke or new to investing. This will never fly if your trying to buy bank REO;s. Now you can get away with it if your dealing with distressed owners. Tell them you will put down $100 in EM but it will be held with your closing company.

Good luck
Curt Davis - KAIZEN Realty538 Reviews
Website View Page
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Scott Williams
Battle Creek, MI · Member since 2008 · 87 posts · 11 votes
15y
Don't think there is much of a way around it these days.

Most listings I see want not only earnest money but also proof of funds/preapproval letter to submit an offer.

From a sellers point of view prices are already low..they don't want their time wasted as well.

Whats really annoying is some sellers want emd in certified funds..seems like alot of extra hassle for the potential buyer.

I know as a realtor I will show anyone any house once.

After spending some time with them if I feel they don't have access to cash or financing I will tell them I need proof of funds before showing any more houses..I don't get paid unless they have the ability to buy something.
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George Courtney
OP
Real Estate Investor · Los Angeles, CA · Member since 2010 · 59 posts · 5 votes
15y
thanx guys, your advice is much needed & well appreciated
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Account Closed
Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes
15y
you usually get a day or 2 to put the earnest deposit with the closing agent of your choice...if you have built up a buyer's list and pick the right properties, and/or market the heck outta it, you just may be able to get this to work...but what will you do then?? assign it, or just look for a few bucks as a bird dog?? i just had an 87 unit complex under contract with a 30,000 earnest deposit...i had built up a good repoire with the seller's agent and so he was pretty relaxed with me and gave me a week to put the deposit in my attorney's escrow account...theoretically i may have been able to find an end buyer by then, but i was looking for myself...of course, i should mention i had the money, and you shouldn't tell people you plan to put the money in an account if you don't have it and won't have it...that's not the way to make a name for yourself...

forgot to mention that when i put in offers, i send in a copy of a check with the contract and say that the earnest money will be certified funds (money order) within 48 hours
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Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
Bill's idea about using a note in lieu of earnest money is a good one and I have heard of people using it successfully. I have always used cash and my sellers are normally motivated such that I can tie properties up for $10 so it hasn't really mattered much to me.

Are you finding good deals that have multiple offer situations such that the magnitude of the earnest money is really important? Are these resi or commercial properties?
1 Reply
April G
Real Estate Investor · Westminster, CO · Member since 2009 · 38 posts · 2 votes
15y
If you are doing a short sale can you write the check out to the seller if a title company isnt involved yet? If you have a good repore with the seller of course....contractually protected too...
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
Originally posted by April G:
If you are doing a short sale can you write the check out to the seller if a title company isnt involved yet? If you have a good repore with the seller of course....contractually protected too...

If the seller is represented by a broker/agent, you will be required to submit the EM funds to the broker or to the closing/title agent (whomever the broker requests).

If the seller is not represented, you can certainly make the EM payable to the seller, but the obvious risk is that the seller takes the money and you never see it again. That's the value of using an escrow company to hold the money -- you can be sure you'll get it back if the contract calls for you to get it back.
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Chris Colvard
Wholesaler · Dallas, TX · Member since 2009 · 308 posts · 92 votes
15y
Consideration is the key here. If there is none, do you have a contract? Most states require consideration for it to be a valid contract.

See my wholesale contract for a way to minimize earnest money any still meet these guidelines:

[url=http://www.biggerpockets.com/files/user/Chris_Colvard/file/Purchase-Agreement-pdf[/url]?
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Chris Colvard
Wholesaler · Dallas, TX · Member since 2009 · 308 posts · 92 votes
15y
Sorry, Here's a functional link:

http://www.biggerpockets.com/files/user/Chris_Colvard/file/Purchase-Agreement-pdf?
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
Originally posted by Chris Colvard:
Consideration is the key here. If there is none, do you have a contract? Most states require consideration for it to be a valid contract.

Yes, you need consideration to have a valid contract.

BUT (and this is a big BUT), in a Purchase & Sale Agreement, earnest money is not the main form of consideration. For both the buyer and the seller, the main form of consideration for a P&S Agreement is *THE PROMISE* to follow through on the transaction (buying or selling).

So, while earnest money probably makes a stronger contract, it's not required for a P&S Agreement to be valid.

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Chris Colvard
Wholesaler · Dallas, TX · Member since 2009 · 308 posts · 92 votes
15y
J Scott,

In Texas it is required. This can vary by state.

So everyone else, please check the state you are in to see if it is a requirement.
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
Originally posted by Chris Colvard:
J Scott,
In Texas it is required. This can vary by state.

So everyone else, please check the state you are in to see if it is a requirement.

Chris,

With all due respect, I believe you are incorrect here. We've had this discussion here on BP on several occasions, and I believe most here are in agreement on that. In fact, one thread specifically discussed EM in Texas, and everyone ultimately agreed that there is no EM required in that state (or any other) for the contract to be valid.

But, I'm more convinced of this belief based on the fact that this specifically was a question on the general real estate law (not state specific) section of my real estate licensing exam. The correct answer given on the exam (the pre-test) was that earnest money is not required for a contract to be valid.

Contract law states that for a contract to valid, it requires consideration in the form of cash or equivalent. In a real estate contract, the promise to follow through on the transaction is considered acceptable consideration, and I don't believe this is contradicted by any state law in any state.

If I'm wrong, I apologize, but I'm fairly certain that this piece of contract law is consistent throughout the country.
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Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y
As far as contract law is concerned, I would have to agree with Jason on this, however, to avoid any discepancies at all, why not put some type of financial consideration down? In fact, the more cash put down, especially when dealing with REO or short sales, the stronger your offer looks, so why make it appear weaker by not giving a cash EMD?

For those looking to eliminate the need to place an EMD, I say I don't belong in this game if you don't have the means to put something down.
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Chris Colvard
Wholesaler · Dallas, TX · Member since 2009 · 308 posts · 92 votes
15y
J Scott,

I hear you. I was trying to place the earnest money check with escrow, and then have it remain un-cashed until my contingencies were removed.

I got opinions from three different attorneys because I wanted to be able to sue for specific performance if a seller backed out of a contract.

Each said my chances of winning a suit for specific performance where basically zero without cash consideration. Chances of winning doubled by having a nonrefundable earnest money (part one) $50.00 together with a refundable earnest money (part two) in an amount based on the transaction.

I'm not saying that you are wrong, but I am saying that a judge will look at a "promises to close" differently than actual cash consideration. You don't want to be in a situation where the other side can say, it's not a valid contract.

It's a basic contract law premise. A promise is not the same as cash as far as consideration in contract law. Contract law actually varies from state to state, but they are state laws.
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
Originally posted by Will Barnard:
As far as contract law is concerned, I would have to agree with Jason on this, however, to avoid any discepancies at all, why not put some type of financial consideration down?

Completely agree with Will that this is more a philosophical issue than anything -- there's absolutely no reason not to put SOMETHING down in EM, even if it's just $50 or $100 to provide a psychological and emotional attachment to your offer for the seller.

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Kevin Kaczmarek
Real Estate Investor · Fishers, IN · Member since 2009 · 408 posts · 196 votes
15y
The best way to not have to put an EMD down is to have done a bunch of transactions previously with a track record of closing on the deals you agree to purchase from that seller. Then and only then should you bypass putting EMD's down. Like Wil said, for those looking to avoid the EMD you might want to avoid getting in the game.
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Kristina Gaskins
Charlotte, NC · Member since 2011 · 13 posts · 1 vote
15y
Love this topic as I am working with a realtor right now that won't budge on an offer if I don't give her at least $1,000!!! As a new investor, I need to hold on to as much money as possible. Why is $500 unreasonable?
0 Reply
Chris Colvard
Wholesaler · Dallas, TX · Member since 2009 · 308 posts · 92 votes
15y
What is the price of the property?

How are you funding the deal?
0 Reply
Jake Kucheck
Residential Real Estate Agent · Costa Mesa, CA · Member since 2008 · 1k+ posts · 380 votes
15y
With "retail" transactions (you know, those weird people that buy houses to live in them), the EMD is as follows (at least in my neck of the woods):

1%: I like this house, but I don't love it.
2%: I REALLY like this house.
3%: I'm in love with this house and my agent is a bit of a novice.
10%+: I'm paying cash and expect a significant discount.

So for investors, keep in mind that your offer is being compared to other offers, and even if it's not, there's still an industry standard.

If you come at me with a Zero EMD, I'll be countering it, guaranteed.
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Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
Most folks don't counter though Jake...the buyer is taking a problem off of the seller's hands in many instances. I am sure I could get in the deal for zero earnest money in most cases where sellers are very motivated, but putting up $10 to make it a bit more legitimate seems fine to me.
0 Reply
Mike Morrison
Contractor · Woodlands, TX · Member since 2010 · 95 posts · 18 votes
15y
What makes the contract binding in Texas is the "unrestricted right to terminate the contract" section. This let's the buyer out of the contract for any reason. If there is EM it must be returned by title co. to the buyer. If no EM then no problem.

To make the contract valiid, the Buyer MUST pay the Seller an agreed to amount for a "drop dead" date to terminate the contract.That's where the consideration comes in. Buyer pays the Seller directly for the unrestricted right to terminate the contract within a specified time period.
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