Factoring in Earnest Money Deposits?

5 Replies

One thing I'm confused about is earnest money deposits and how to account for them when coming up with my offer amount. Let's say, just for an example, that an earnest money deposit of $5000 is required (we're obviously talking about a hypothetical listed property here). Does that mean that for me to make $5000 on the deal, my spread has to be $10,000? Or, otherwise stated, that if my spread of only $5000, I'll only break even on the deal? Thanks. 

Hi Jordan,

It can be confusing and I don't know if you're talking about wholesaling a deal or buying a property cash so I'll do my best to answer your question and I hope it helps.

If you are going to wholesale a deal my first piece of advice would be to not put down such a large EMD. If the seller is unwilling to accept a small EMD then you have a couple of options. The first is to get the seller to agree in writing to refund your EMD to you when you find a buyer and they have signed the purchase agreement. The second option is to increase your wholesale fee by the amount of the EMD. This doesn't cost the end buyer any more as they'll be getting a "credit" toward the purchase price in the amount of the EMD you put down.

I hope that helps clear things up. And I'm anxious to see how others handle this situation as well.

Best of luck!

Eric

@Jordan Solomon  You may be mixing apples and oranges here. If a property is 30k with 5k ernst money, which I would do as a wholesale (EVER) you only have to bring 25 (plus closing cost) to closing. Any buyer will realize that if you have 5k sitting there u want that money plus a fee.

Yes, you would assign your deposit with the contract, the deposit becomes your buyer's deposit. EMD can not be released without consent by a seller prior to settlement. If you want 5 on the assignment, collect 5K for the deposit and 5K for the right to purchase.

Now, you could arrange for the amounts to be returned between the settlement agent and the buyer, but your funds are at risk if the buyer failed to close and walked away, you'd have to chase that buyer down.

My suggestion, don't do properties requiring larger EMD unless you already know your buyers and know they have the money! :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Thanks everyone for the ultra-fast responses! @Eric Black, yes, my question does pertain to wholesaling a deal, as that's all I am focusing on for now. Sure, the ideal scenario would be to not put down such a large EMD, but my understanding is that if I'm making an offer on listed property (as opposed to FSBO), and especially an REO, I don't really have a choice. And that's why I'm trying to figure out the math involved here. Not that I'm even at that point yet, but needless to say, when such sums of money are involved, I don't want any surprises!