Earnest money deposit on a new construction

[Alex Thomsen]

Hi BP community,

I have a situation, which seems a bit odd, and I would be grateful for any insights. I am looking for single family investment/rental properties in Charlotte NC and my agent found a new construction, which is already completed. We negotiated the price down a bit from $350k to $340k and the construction company is committed to pay 2% of seller's paid costs as incentives if I use their preferred lender. So far everything seems reasonable. However, dealing with the seller is a bit of a mess - she is extremely pushy and want me to place a $50k earnest money deposit ASAP. I am having a hard time understanding why I would need to pay $50k earnest money deposit when the house is already completed and I can close fast. I know that earnest money deposit is given as an indication of being serious but I just feel that $50k is a bit outrageous. I am getting nervous over potential issues with the house or the loan options, and the prospect of either being pushed into a bad deal or losing $50k in a nano second. Therefore, I wonder if an earnest money deposit of $50k is normal for a newly built single family house? 

[Jay Hinrichs]

Quote from @Alex Thomsen:

Quote from @Jason Wray:

Alex,

There is never a need to put that much money in earnest its usually because the seller or the builder is in a bind and need to quickly settle their debts or pay their vendors. You as the buyer also have rights under fair lending and you should never be forced to use a builders lender. 90% of the time lenders drop the ball and end up not being able to close on time or their overlays cost the buyer the deal and in some cases earnest money.

I would walk away from a deal that forces you to put $50K in earnest and use some generic lender who may not even be able to close the deal. Sounds like they have a back door deal where the lender or loan officer and builder or realtor all benefit from using each other (which is illegal).

Keep in mind its end of year pretty much every seller and builder is offering a 2% seller credit its the norm.

$50K in earnest is a lot and if the lender drops the ball are you positive they can get the credit denial out in time to refund the earnest? Charlotte is loaded with inventory are you sure this new build at Max cost is worth the headache versus a home selling for less that you can renovate yourself and increase the ARV?

Thanks Jason, this is really great input. I was also thinking something along those lines, but I am glad to know that you also think that $50k in earnest money deposit is excessive. I actually just sold an older property because there were too many repairs, so I was hoping to find something more hands off as I am an out of state investor.

As a new home builder myself in multiple markets.. Charleston SC and Portland OR. if its a presale we require 10 to 20k EM on 700 to 1 mil purchase none refundable and released once we go vertical. If the house is done NOPE just customary for our market which is 5 to 10k what we focus on is how much downpayment and lender they are using.. a good portion of our sales are all cash so that removes that uncertainty.. Unless you were getting a smokin deal like under 300k you might think to do that..  But one thing you can do so they dont high jack your EM  remember both buyer and seller have to sign to release it if does not close.
Is see if you can put up NO EM but put 50k as downpaymnet for the property show it as part of the purchase price then you can demand it back on just your sig