Earnest money amount

18 Replies

For private sales is it reasonable to have the earnest money amount be something between $10 and $1000? And I assume for REOs and short sales it would be greater?

Does it raise a red flag to the seller if I offer only $100?

@Patrick Britton

I usually never bring up earnest money when dealing with private sellers unless they ask about it.  If they do I will tell them I can put down $500 to $1,000 with MY closing attorney.  I usually get the seller to close with my attorney as well. 

@Patrick Britton In my area, it's customary to have the EMD be roughly 1% of the purchase price. As an agent, I would encourage my sellers not to accept anything lower than $1000 unless it was a very special situation.

Wow Dawn! 1%? So the EMD on a $250,000 property would be $2,500... I must say that in my neck of the woods it's about half that. And I have heard amounts being as low as 100 bucks. But this is for a wholesale deal on an out-of-state owner wanting to get rid of the property to whomever comes first.

Mind you, Raleigh, North Carolina is a little more high-end then what I am typically looking at.

@Patrick Britton If you are talking about wholesale deals, and you are working directly with the owners, I think you might be able to get away with little or no earnest money. I imagine most sellers don't understand the value in having higher EMD. Retail deals = no way.

I agree with Curt Davis. Unless they have bought and sold a lot of property, a private seller may not even ask about earnest money. If they don't, I wouldn't offer it. You are not trying to screw them over as long as they fulfill their end of the agreement.

I have given as little as $10 to private sellers. If I was buying an REO I would give a large deposit 10%~ so my offer looks strong.

I have never gotten a clear answer whether an earnest money deposit is even required to form a legally binding contract.

Seems like $500 is pretty customary in my knock of the woods for median priced homes. I've seen REO's asking for at least $1000.

I agree that in private sales it's: "whatever works for the seller is good enough".  I'm sure there are plenty of situations where the seller either doesn't care or doesn't know enough about it to ask. 

If I were the seller, I would not take you very serious with a $10 EMD offer.... but that may just be me

@Curt Davis is right. Don't bring it up unless the seller does.  If a seller does bring it up or wants a large amount we always tell them the EM is a non-issue no matter the amount because we will not subject EM for any reason whatsoever no matter how strong a deal appears to be so whether it is $500 or $5000 it isn't going to matter.

Of course it looks suspect to offer a 2 or 3 digit EMD. Standard in this area is 1 to 2 percent. And I would never let it be held by your attorney either. Either by my broker or my title company.

If you get a seller who wants an actual EMD paid where they can actually get it if you fail to perform, you are dealing with a seller smart enough that you are probably not going to be wholesaling his house.

For our primary residence that we purchased last month in the NE Durham NC area on a $194k property we put down $1k EMD to strengthen our offer. On the numerous other homes that were around the same price point that we submitted offers on prior to purchasing this one, our EMD was $500-$1500.

A smart seller will have the buyer to put the EM in escrow of the sellers' choice limit the weasel clause that buyers love to used.


Joe Gore

Originally posted by @Ned Carey :

I have given as little as $10 to private sellers. If I was buying an REO I would give a large deposit 10%~ so my offer looks strong.

I have never gotten a clear answer whether an earnest money deposit is even required to form a legally binding contract.

 Hi Ned,

Im not sure if you've gotten this answer yet... But here you go: Technically, in order to have a legally binding contract, there needs to be 3 things: (1) an offer, (2) an acceptance, and (3) consideration. The earnest money is an issue within the element of consideration. When you execute a purchase agreement, you are obtaining equitable rights in the property (opposed to legal rights when you close on the deed). These equitable rights are analogous to an option (in this context) where you tie up the property for x amount of time. In order to legally obtain these rights, consideration is required. The earnest money is that consideration. Without it, your "option" to purchase the property is not legally binding. However, two things: (1) The earnest money can (legally) be nominal (literally $10), as sham consideration has to be WAY out of wack to not be respected, and (2) its highly doubtful that a motivated seller will have the wherewithal or the resources to back out of the deal if no earnest money is provided. 

I hope i was able to make that more clear... Let me know if you have any questions. And good luck in the trenches!

@Ned Carey

I realize this is an old post, but I will add my two cents Ned. 

It is likely a state by state thing, but in Texas earnest money is not required to have a legally binding contract, but there must be an "option fee" in order to have a termination option (under para. 23) when using the state promulgated (TREC) form. 

In Texas, E/M is only one form of consideration, not the only form of consideration.

Originally posted by @Nicholas Hooyman :
Originally posted by @Ned Carey:

I have given as little as $10 to private sellers. If I was buying an REO I would give a large deposit 10%~ so my offer looks strong.

I have never gotten a clear answer whether an earnest money deposit is even required to form a legally binding contract.

 Hi Ned,

Im not sure if you've gotten this answer yet... But here you go: Technically, in order to have a legally binding contract, there needs to be 3 things: (1) an offer, (2) an acceptance, and (3) consideration. The earnest money is an issue within the element of consideration.  .   .   .

Nicholas,

Yes I understand this and have read an considerable amount about consideration. If it were only so simple. No attorney in MD has been able to answer this for me. By the way this would likely vary by state law and likely court precedents.

Consideration must go in both directions. Why is my promise to buy at a specific price not consideration if the seller's promise to sell at a specific price is consideration in return? Wouldn't the price paid and the property in return for that price constitute consideration? Or the promise to pay and the promise to sell constitute consideration.

My understanding of consideration makes me believe that the above would apply and no earnest money deposit should be necessary. Yet in my area people regularly say and EMD is required. Yet no one can tell my why.

Thanks for replying - Ned

@Ned Carey

That is exactly how it is considered in Texas. The promise to perform is consideration enough and as long as all other elements of a contract exist, you do indeed have a contract irrespective of earnest money.

@Patrick Britton

When dealing with private sellers. It all depends on how motivated the seller is, with that said, I will never put up more than $100.

When dealing with listed properties you have to play by realtors rules. But I always put up at little as possible.

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