Earnest money going hard on Day 1??

Question

I was talking to an established syndicator today about the market for large multi-family properties today and he said that its become standard practice in todays market for earnest money to go hard on Day 1 after a PSA is signed.

The inspection period or financing period where you should be able to walk and get your earnest money back if something is wrong with the property or you discover the seller is cooking the books doesn't really hold any weight anymore. Furthermore he said that there are some sellers out there that put up properties knowing this is an issue just to try to sucker people out of earnest money.

Has anyone else encountered this in todays market? This seems crazy and stupid and it makes me wonder why anyone would agree to this?

@Brian Burkeundefined

@Joe Fairlessundefined

@Omar Khanundefined

@Todd Dexheimerundefined

@Michael Swan undefined

@Jay Hinrichs undefined

Michael Swan · Answer

I just did two deals. A 57 unit in a Mentor Ohio and a 24 unit in Painesville Ohio and all 12 of the other complexes that I have purchased the money does not go hard until all our financial and physical inspection dates were over or if we needed to extend, due to financing or the seller telling untruths etc...

I call BS on any one that gives you that hogwash!!

Swanny

I call BS on any one that gives you that hogwash!!

Swanny

Brian Burke · Answer

@Andrew Brewer that is incorrect information. I’ll close 1,000 units this year and only put up a small “token” hard deposit on a couple of deals and only because they were off-market and I felt it was important to show the seller that we weren’t just fishing.  Those two are two of four deals where I’ve put up any hard money in 3,000 units.

Having said that, hard money is more common in some markets, less common in others. And it is an absolute must for any buyer that has any hint of a shaky reputation in performing on their contracts (or has an inability to produce multiple references from brokers or sellers to vouch for them).  It’s also more common in uber-competitive marketed deals. Maybe my reluctance to comply is the reason why my hit rate on marketed deals is close to zero...

Jay Hinrichs · Answer

I don't know about MF.  in my world just depends on how good a deal I am getting.. if its a screaming deal I offer it. And that's how I beat out the multiple offer situations.. but its usually 5 to 10k not 100k.

a few years ago I did put up 40k hard and the seller would not close.. I had to sue for performance took two years and 30k and I had to put all the cash into escrow on the closing day and let it sit there.. but it had 350k of up side once I won my litigation.. so that was worth it to us.

but in my little world of doing sub 1 mil deals not common.. But its a good tool to have in your tool belt if its a competitive offer situation.. plus with us.. we know what it is when we are buying it.. there is no real due diligence to be had . And if we wiff on one its only 5k or so and one of maybe 10 or so we do that month.. so not a big deal.

but if I was doing a MF or larger commercial deal I personally would not go hard day one unless I knew I was buying at an incredible price to market.  not with a 100k any ways..

Omar Khan · Answer

Short of having as impeccable a resume as Brian Burke, in most major markets (think Dallas, Atlanta, etc) you will need to offer hard money. It doesn't all have to go hard day one but a nice chunk of change must. That being said, there are specific carve-outs for fraud, continuing performance, clean title, etc.

Typically, the sponsor is putting their own money in because not many sponsors are raising capital without a deal being under contract.

Shannon Wright · Answer

In all the assignment deals I have handled as escrow, I have never seen EMD's go hard that quickly. Cali is definitely a disclosure state, so the rules are all predicated on that but everyone needs a chance to make informed decisions once under contract. I would also say that a large portion of my investor escrows (assignments and doubles) never even have an EMD at all, we just go straight to closing and they deposit all at once. Crazy to think of having $100k go hard on day 1, but it's not MY money. :)

Andrew Brewer · Answer

the carve outs for fraud or a major performance dip were not mentioned in my conversation but that makes it much more understandable if that is the case, at least there is some protection for the investors in the case of a gross misrepresentation by the seller which would be the real fear for me.

Todd Dexheimer · Answer

In some markets that is the case. The markets that I am in it is rare to put anything hard day 1. Typically if you want to sweeten the offer, you will have 25-50% hard after 10-15 days. There are also carve outs for fraud and properties undergoing a massive performance dip prior to closing. We add those no matter what and also have a provision that requires the seller to pay us if they fail to close for various reasons.

Scott Mac · Answer

If it's his own hard money on the line and not the investors, maybe somehow it maths out for him (???)

A more risk more reward type of thing (???)

Andrew Brewer · Answer

The guy I was talking to is a big name guy with a great reputation, but I just had to double check this because it seemed so insane that any savvy buyer would agree to this with 100k on the line.

A majority of this syndicators deals are 10 million+ on market deals so maybe @Brian Burke is right there

Ola Dantis · Answer

@Andrew Brewer On Day 1 of executed PSA?! The full earnest money?!! Sounds unorthodox for the most part.

We are closing on a 100+ deal next month, and we went with the standard earnest money deposit.

However, to sweeten our offer, we tend to include other concessions in our PSA to increase our chances of getting awarded the deal, but nothing as extreme as EMD going hard on Day 1!

Earnest money going hard on Day 1??

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