earnest money for contract

2 Replies

Hello BP, how much money would you need down for a purchase agreement for a property under $40k in OH as a wholesaler. Just asking because some use a percentage rule and some just use $10 that I've seen.

$500-$1,000 is a common EM amount for properties priced in that range.

Read up on Ohio licensing laws before dealing in any R.E. wholesale deals.

I'll suggest those going into business, any business, crack open a business law text book, don't need to take a test or read everything, but contract law, what constitutes consideration, agency relationships, what torts are, just saying that the basics of these areas are really worth understanding in RE, they apply.

EM is pretty much by local custom, what is generally acceptable. I have seen contracts with $100 and I've seen EM at 10% of the sale price, somewhere in between is probably sufficient. 

As to a promise being consideration or Ten bucks. Consideration is a key requirement to have an enforceable, valid contract. If I order a set of tires from a tire dealer that he usually doesn't carry in stock, he will likely want money down, how much might depend on his comfort level with my order. My promise to purchase might be sufficient, $50.00 might cover it or a $100.00 on a set of $1,000.00 tires. 

Consideration must be equitable, reasonable for the size and scope of the transaction. $1,000 will not be sufficient on a million dollar property, $10,000 might be. On any real estate contract, $10.00 is not equitable, neither is just your promise as it might be buying a set of tires. 

EM is really to show good faith and to indemnify a seller in the event of a financial loss from the non-performance of a buyer. $10.00 won't do either in real estate since deals are in thousands of dollars and non-performance can cause actual and consequential damages. That can often be $1,000 on any property. The EM is an amount that is readily available to an owner arising from such losses. Many contracts limit a buyer's or seller's liability to 10% of a sale price, plus costs. but that means a law suit generally to acquire such amounts. EM is held by (should be held by) a third party, RE broker or settlement agent or attorney. That money is in trust and there are requirements to release funds held in trust to be disbursed, but the requirements isn't going to require a court order usually. So, the funds are readily available. 

Sufficient EM or consideration is the glue holding your contract together, the more you use the better it sticks. 

Now, if you must get by on the cheap, use an earnest money note, a promissory note in a sufficient amount. That note comes due upon demand or at settlement, you just gave sufficient consideration at a reasonable dollar amount in line with the value of the transaction and financed it. This may not cut it in all locations, but it may be an option. 

What is usual and customary will govern, not someone's opinion of how valuable a promise is or some wheeler dealer giving ten bucks on a contract. Don't get hung up on the phrase "good and valuable consideration" in real estate, what is good and valuable can be determined, RE is not a set of tires.  That phrase goes more to the construction of a contract than to what is considered equitable consideration given.   

As a title company what is customary in your area, they should know. Often, Realtors are pressured by brokers to collect sufficient amounts, they can be a little higher but it may also set the bar as to what is customary. I'd think in most places, $500 to $1,000 would cut it on a $40K house, but ten bucks certainly won't be equitable. :)