Putting Earnest Money

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Putting Earnest Money

Matthew J. T.
Real Estate Investor · Albuquerque, NM · Member since 2011 · 156 posts · 20 votes

When having the seller sign the contract, I understand that you can put 10$ on it to secure the contract, but if seller asks you why you are putting in so little what do you them? Don't they want to know that you are serious? As I am going to be collecting a deposit from my end by to know he is serious, how is the motivated seller going to know I'm serious off of 10$, and is there any law, or rule that states you must put a certain amount to secure the contract?

Matt

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Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y

Matt,
I don't know all 50 state laws, but most of them I do know about state that you need to have "consideration" for a contract to be binding. That consideration could mean lots of things.

In the grand scheme of things, you need to be putting more than $10 down anyways, that makes you look unprofessional in my opinion and I don't care what any guru says otherwise claiming that you should use as little of your own money as possible. Secondly, why would you even want to only put down $10? Even a $100 is low, but if you did use $100, I would tell the seller that once the contract was fully executed in escrow, and the due diligence period was over, that you would be placing additional earnest money prior to closing. That should appease their minds.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y

    Matt,
    I don't know all 50 state laws, but most of them I do know about state that you need to have "consideration" for a contract to be binding. That consideration could mean lots of things.

    In the grand scheme of things, you need to be putting more than $10 down anyways, that makes you look unprofessional in my opinion and I don't care what any guru says otherwise claiming that you should use as little of your own money as possible. Secondly, why would you even want to only put down $10? Even a $100 is low, but if you did use $100, I would tell the seller that once the contract was fully executed in escrow, and the due diligence period was over, that you would be placing additional earnest money prior to closing. That should appease their minds.

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  • Matthew J. T.
    OP
    Real Estate Investor · Albuquerque, NM · Member since 2011 · 156 posts · 20 votes
    15y

    Thanks Will, I've seen many people do it that way that's why, I've also read " Earnest Money - $1 or $10. Actually this is used for legal consideration, which doesn't have to be money at all. Basic business law says legal contract need 3 things: an offer, an acceptance, and consideration. Consideration is to show you're not getting something (the house) for nothing. Your offer price can be considered consideration IMO." But I will take what you said into consideration.

    Matt

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  • Matthew J. T.
    OP
    Real Estate Investor · Albuquerque, NM · Member since 2011 · 156 posts · 20 votes
    15y

    via Ryan Webber :

    "Consideration" is required for a contract to be valid. And from the dozen states or so that I have researched in the past, "consideration" can be just a "promise" to buy. An actual earnest money deposit is NOT a requirement of valid consideration or a valid contract.

    I believe, but have absolutely no evidence, that this is a national courts interpretation/decision or a generally accepted interpretation of contract law because of how similarly I've seen it phrased in different states.

    Not to say that there aren't states that interpret it differently, but the dozen or so I have researched are all the same.

    In Texas at the least, I have had this discussion with several very well qualified attorneys, and they all agree that earnest money is NOT required for a valid and enforceable contract in Texas. They won't ever give me any definitiveness on any other states, though.

    I personally only put earnest money on deals that are listed with realtors, and that's because any realtor worth their weight in dirt is going to require you to.

    https://www.biggerpockets.com/forums/93/topics/4274-assigning-contracts-wholesaling-questions

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  • Scott Hubbard
    Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes
    15y
    Originally posted by Matt James:
    Thanks Will, I've seen many people do it that way that's why, I've also read " Earnest Money - $1 or $10. Actually this is used for legal consideration, which doesn't have to be money at all. Basic business law says legal contract need 3 things: an offer, an acceptance, and consideration. Consideration is to show you're not getting something (the house) for nothing. Your offer price can be considered consideration IMO." But I will take what you said into consideration.

    Matt

    While I agree with Ryan's statement below in theory, in practice it puts the buyer at risk. Consideration is part of commom law and when this consideration is not monetary you could leave yourself in a position where the court may decide if the consideration was adequate.

    An attorney you consult should inform you that not having enough consideration to cover the other party's losses may put you at risk. Chances are there is already case law on the books (in your county) where buyers have walked away from a contract and were required to pay for seller's losses over and above the original consideration becuase the a court it to be inadequate.

    In my opinion, you should always use a monetary value. Kepp it simple. I have heard investors using their "knowledge, experience, or time" as consideration, but the court may have a hard time determining such intangibles.

    Personally, I use the least amount of money the seller (agent) will accept, but keep my closing periods relatively short in order to minimize potential losses should I walk away.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    15y

    I require buyers to put up a sizable earnest money deposit on my listings.

    Even though you do not have to have it for a contract the buyer has to have something to lose to keep them honest and moving forward in the contract.It has to be painful for them to walk away.Otherwise your sellers property is tied up for nothing to show for it but wasted time.

    A buyer will have to feel real confident about what they are doing to put up sizable earnest money.Usually having them put up bu earnest money weeds out the infomercial clowns trying to be something they are not.

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  • Matthew J. T.
    OP
    Real Estate Investor · Albuquerque, NM · Member since 2011 · 156 posts · 20 votes
    15y

    Joel, I agree about collecting a earnest deposit from you end buyer, but I'm referring to the earnest money deposit people typically make to the seller of the property.

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  • Al Kirk
    Real Estate Investor · Raleigh, NC · Member since 2009 · 5 posts · 0 votes
    15y

    I agree that you should put at least $100 in earnest money. However to protect yourself, make sure you have contingencies in the contract to get your money back in case you don't buy.

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  • Matthew J. T.
    OP
    Real Estate Investor · Albuquerque, NM · Member since 2011 · 156 posts · 20 votes
    15y

    Thanks Al, my attorney drew me up a clause to get my money back incase the deal don't go through. The 100$ is to be paid directly to the title company correct? Or do I pay for it up front with the seller? Also once that money is submitted do you get it back or does it just go towards purchase you made once the deal closes completely?

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  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    15y

    $10 or $100 may work in some markets with some sellers, but as said above this value may be legal but is not impressive... assuming a seller actually would accept this sum. I never give any money (or checks) to the seller. It goes directly to the closing attorney's firm (or title company) and into escrow at contract signing.

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  • Stinson Bland
    Wholesaler · Dallas, TX · Member since 2011 · 294 posts · 152 votes
    15y

    I always try to avoid putting up an earnest deposit... simply because I HATE writing checks. If a seller is questioning my intentions and the seriousness of my offer; I'll put up at least $1K and go higher if needed to get the deal done. I will only consider doing this on good deals that I am 100% confident in.

    I make very deep offers and I will always find a buyer or close on them. Plus, I have a great relationship with my title office and my contract is rock solid... so I'm not worried about losing my money.

    If I'm not confident in the deal, I stick with a $100.00 termination option and tell my seller that I plan to market their property to other investors that may be willing to pay a higher price. I figure $100.00 is worth the risk to try to find a buyer for the deal and my seller deserves at least that for giving me the opportunity.

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  • Craig P.
    Real Estate Investor · Denver, CO · Member since 2011 · 74 posts · 24 votes
    15y

    My advice is to put more than $10 bucks, our lawyers advise us that earnest money needs to be something more substantial. We focus on private sellers not Bank REO stuff which obviously is different. On private seller deals we typically put $250 down per contract. I also advise you to get the EM into title as soon as possible just in case your seller attempts to change their mind (which happens). This way the contract is valid and can be recorded and you have some legal recourse.

    I also think you should be prepared to close should you not find a back end buyer. Have a capital from a HM lender at your fingertips and use it when you cant find a back-end buyer.

    Look at the numbers and see if you can buy and list as a fixer as that is a great strategy to use assuming the deal is private and the numbers are there.

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  • Bill Walston
    Real Estate Investor · Northeast TN, TN · Member since 2008 · 516 posts · 361 votes
    15y
    Originally posted by Matt James:
    Thanks Al, my attorney drew me up a clause to get my money back incase the deal don't go through. The 100$ is to be paid directly to the title company correct? Or do I pay for it up front with the seller? Also once that money is submitted do you get it back or does it just go towards purchase you made once the deal closes completely?

    Matt, I would not give a deposit directly to the seller unless absolutely necessary. If a realtor is involved have the agency hold the deposit. Or the title company that will be doing your closing. The deposit is not returned if you close on the deal. It's applied to the purchase.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y

    Earnest money deposits (EMD's) NEVER go to the seller, they should always go to the closing agent whjich is either an attorney or a title/escrow company who acts as the third party transaction facilitator.

    It was also mentioned to make sure you have a contingency so that you can back out if need be and get your EMD back. In the case where the EMD is only $100, I would say "who cares" it is such a small amount of money (although I would always want a contingency to get out of a contract for at least a small period of time to complete due diligence, regarldess of the amount of the EMD I have at risk and especially if it is a large EMD.

    For REO's here in CA, I almost always have at least 410k of EMD as it is necessary here and shows to the seller that I am a real and serious cash buyer. I have even put up $50k at times.

    If you don't have $250 or more in cash to use for EMD's, I don;t think you belong in the RE investment game. This is just my opinion, but I feel strongly about it. If that was the scenario for someone, I would suggest to them to work their job and save up until they did have such funds.

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  • David Mithell
    Real Estate Investor · San Diego, CA and all states · Member since 2011 · 10 posts · 5 votes
    15y

    What an interesting topic!

    When flipping short sales, I don't offer earnest money to the bank and have never had a bank request it.

    When going through a listing agent, about 1/5th of the agents demand earnest money. I explain that earnest money has two purposes, both of which are satisfied elsewise:

    1. To show I have money. I show proof of substantial funds in lieu of earnest money.

    2. To show intent to purchase, that I won't go elsewhere. My intent is shown by the fact that I plan to make money, and that I purchase multiple homes. I'm not going to live there, and purchasing another home has almost no bearing on purchasing this one.

    On the other hand (--does this make me a hypocrite?--) I request substantial earnest money from my buyers in a flip. This is to show that they have money, and to bind them to the sale. I price low, to attract multiple bidders and if the highest price has no earnest money, I'll probably sell to the next person.

    The earnest money serves a practical purpose of compensating the seller for lost time and marketing ability if the buyer bails out because the buyer found a more attractive property.

    Funding is not a limitation, so I can buy the property regardless of others in my pipeline. There's no reason for me to offer earnest money, and there's every reason for me to request it. Weird, eh?

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y
    Originally posted by David Mitchell:
    There's no reason for me to offer earnest money, and there's every reason for me to request it. Weird, eh?
    I agree that is a bit hypocritical but it is also good business on your part if you can get away with it. As to no reason to offer EMD's, I would argue that without it, you could be opening the door to get burned some day by a seller claiming you did not have a bonified purchase contract without financial consideration. Proof of funds is not consideration. However, that said, if you can continue to get deals done that way, why not. On the other hand, what is the harm in giving $250 in EMD for homes in CA that are worth $300k or often much more? To me, there is really no risk in that and your contract contingencies protect your EMD's.

    Now, with REO purchases, I can assure you that you will not be successful in not offering EMD's as you will not get your offer past the list broker without it. In addition, if your EMD on an REO in CA is only $250, you can bet your bottom dollar you will either be last in line, looked at under a microscope, and/or get countered for a larger EMD.

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  • Tiara Murray
    Investor · Detroit, MI · Member since 2008 · 296 posts · 11 votes
    15y

    Im looking to invest in REOs. I hear that there is at least a $1000 deposit on bank owned homes. I figured to make my offer more inticing I could offer to close within 24-48 hours. Will this approach sweeten my offer or would I just be wasting my time?

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  • Jimmy C.
    Flipper/Rehabber · Seminole, FL · Member since 2010 · 859 posts · 316 votes
    15y

    When dealing with private sellers we have done $100 before when we were starting out.

    IF they ask about it at all (not every time) I would just explain that we cant afford to have thousands of dollars tied up in escrow accounts on all these houses we buy and sell.

    Now that we are flipping REO's we actually are stuck with thousands in escrow, so I could have the same excuse the next time I deal with a private seller.

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  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    15y

    Tiara, The bank will love the fact you will close so quickly but what are you going to do when you dont have a buyer ready to go? Do you have the funds to actually close? You wont get your money back from the bank. Good luck.

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  • Tiara Murray
    Investor · Detroit, MI · Member since 2008 · 296 posts · 11 votes
    15y

    Hi Curt. I do have access to these funds.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y

    Quick close times do improve offers on REO's as do larger EMD's. I use very high EMD's and very quick close times in offers to make up for the lower price (on the few occassions where I offer on an MLS property). On those I am not competing with others, the price is set and the bank sets what they want for the EMD and I don't argue about it, I just give it.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    15y
    Originally posted by Tiara Murray:
    Im looking to invest in REOs. I hear that there is at least a $1000 deposit on bank owned homes. I figured to make my offer more inticing I could offer to close within 24-48 hours. Will this approach sweeten my offer or would I just be wasting my time?

    The banks aren't able to close that fast in most cases, and they know it, so I don't think it would have much impact with them. You might not even be able to set up a U&O to be done that quickly - and that is one of the first things to be done once you have an agreement signed.

    Tell them you will close within 20 days (OK 3 weeks) - and that will make them happier with your offer. And even then, they probably can't close within that time ...

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    15y
    Originally posted by craig patterson:
    ... I also advise you to get the EM into title as soon as possible just in case your seller attempts to change their mind (which happens). This way the contract is valid and can be recorded and you have some legal recourse.
    ...

    Where I'm at, the recorder requires all signatures to be notarized in order to record, so if that is also true in your area (very likely to be true) your contract will have to be signed before a notary first.

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  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    15y
    Originally posted by Steve Babiak:
    Originally posted by Tiara Murray:
    Im looking to invest in REOs. I hear that there is at least a $1000 deposit on bank owned homes. I figured to make my offer more inticing I could offer to close within 24-48 hours. Will this approach sweeten my offer or would I just be wasting my time?

    The banks aren't able to close that fast in most cases, and they know it, so I don't think it would have much impact with them. You might not even be able to set up a U&O to be done that quickly - and that is one of the first things to be done once you have an agreement signed.

    Tell them you will close within 20 days (OK 3 weeks) - and that will make them happier with your offer. And even then, they probably can't close within that time ...

    This is my experience too. Increasing the EMD does get their attention, unrealistically close dates... not so much. I recall once the "counteroffer" changed only the close date from 10 days to about 4 weeks or so. The seller just wasn't set up to close in under 4 weeks. Not atypical.

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  • Chris ClothierBusiness Member
    Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
    15y

    Matt -

    I read your original question and the first response you got was from Will and I have to say I agree with his statement, that a low earnest money deposit can make you look unprofessional and I would add in-experienced as well.

    Whether they are individual sellers or institutions, to be considered serious, you do not want to raise doubts in their minds by trying to present a contract where you have so little to lose. If you are worried about losing your EM if you don't close, you could place the EM at your closing attorney or use a clause for a short due diligence period. The more you 'show' a seller that you are serious by making your offer contract as positive as possible, the more serious you will be taken.

    Good luck -

    Chris

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  • Chris ClothierBusiness Member
    Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
    15y
    Originally posted by Steve Babiak:
    Originally posted by Tiara Murray:
    Im looking to invest in REOs. I hear that there is at least a $1000 deposit on bank owned homes. I figured to make my offer more inticing I could offer to close within 24-48 hours. Will this approach sweeten my offer or would I just be wasting my time?

    The banks aren't able to close that fast in most cases, and they know it, so I don't think it would have much impact with them. You might not even be able to set up a U&O to be done that quickly - and that is one of the first things to be done once you have an agreement signed.

    Tell them you will close within 20 days (OK 3 weeks) - and that will make them happier with your offer. And even then, they probably can't close within that time ...

    Hey Steve and Chris -

    You guys both make really good points about the closing dates and the way the banks look at them, but I have had a different experience.

    Most REO's are represented by brokers or agents down here in Memphis so even though the bank cannot close quickly in most cases, the listing broker or agent is very interested in not wasting time and pushing for the best contract. We write all of our contracts to close in 72 hours and are rarely asked to do that, but they know my quick closing, cash contract has a great likelihood of closing than one with a longer escrow period.

    I think in many cases, it can make your contract stronger and if you have a solid track record of closing, then it can help your contract to get serious attention quickly.

    IN the case of small local banks, where we are dealing with the actual banker,we have been asked to close in 72 hours and often with the banks attorney and title company. In those cases, that quick cash offer is often accepted over other higher priced offers that require funding or inspection periods.

    You both made great points, but I think the quick closing, for those that can actually do it, can increase the strength of your offer to that agent.

    Chris

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