Non Refundable EMD (in Multifamily)

[David Braun]

Hi all! I recently lost a deal I was trying hard to get. We were one of the top two offers but we lost it when the other party offered non refundable EMD. I know this is very common, just wondering how to deal with this. I was uncomfortable putting down EMD as this would be the first deal I did on my own (as part of a syndication) and I didn't feel confident enough.

Are there exceptions in which case the "non refundable" money would nevertheless become refundable?? I.e. what's if the Phase 1 discovers a serious environmental issue? Or structural issue discovered.....? I am sure the non refundability clause can be customized but what are the norms with this? How can I feel more comfortable offering non refundable EMD? Thanks!

[Catherine Emert]

We write offers that earnest money will be non-refundable after the inspection period - you are less likely to back out after the inspection is acceptable so it's a bit safer while still a little risky. 

[David Braun]

Originally posted by @Catherine Emert:

We write offers that earnest money will be non-refundable after the inspection period - you are less likely to back out after the inspection is acceptable so it's a bit safer while still a little risky. 

Yes, that I know. The offers I am competing against are putting up non refundable EMD from day 1. After the inspection period doesn't compete against them.

[Adrie Moses-bailey]

Unless 1) you have a lot of money, 2) you are buying so below market it doesn't matter or 3) you negotiate a very low deposit then I would not offer from day 1. I would think they are offered only once the PSA is signed by which time you should have the DD materials to know if you want to make an offer. Any reason you can't put a badboy carveout (fraud),title or environmental carveout into the EMD agreement?

[Tae Sung Yoon]

In my experience as a realtor, competing against an offer with non-refundable earnest money is hard to compete against because it shows strength & confidence that the buyer will go through with the sale. It also gives the seller a sense of insurance in the event that the deal falls through. The only way for you to compete is by keeping your contract as clean as possible and making sure your terms align with the seller's goals. I always recommend calling the listing agent (or seller if FSBO) and asking them a few questions. They're usually fairly cooperative and will give you some information.

Once you find out their goals & timeline, you can have a better shot of pending by either giving the seller the highest net offer, adding in an "as-is clause", shortest amount of time to close, or by matching the "non-refundable clause" by the other party. This property must've been one heck of a deal if the other buyer offered a "non-refundable clause" to their offer.

With interest rates as low as they are right now, I've noticed that there are a lot more multiple offer situations today than there has been in the last few years. My advice is to act quickly when you find a property that fits your criteria and try to be the first offer. If your offer is going to be below asking price, make sure you back up your offer with an explanation and other comparable sales that have sold within the area. Lastly... Don't give up! A good one will pop up. Just be patient but at the same time... be ready! I wish you the best of luck on your next offer!

[Mark Faustrum]

@David Braun its hard to compete with a solid offer or one with non refundable EMD, from the sellers perspective those deals are more likely to close with no issues or delays and even when the offer is less most sellers might be inclined to accept over a higher offer with contingencies. The market is crazy hot right now, too many people including investors competing for the same properties. I've had a few offers recently that I put in for all cash, no inspections, no contingencies, $10k non refundable deposit and can close in 5 days (or whenever title is ready) and I'm having problems getting deals..... welcome to the new norm (for now anyway)

[Russell Brazil]

You said syndication, so Im assuming this is a commercial grade property? In my market, most of the commercial deals have non-refundable EMDs. 

[David Lilley]

@David Braun the only way to compete with that is to not compete. Either focus on finding off-market deals where you are the only horse in the race or pick a different market. I was in the same predicament when I started out, so I started looking in less competitive markets until I gained enough experience/confidence to compete with those hard money offers. 

[Steve Morris]

Try and write the PSA with EMD non-ref on Day 1, but see if conditions like failure to appraise at price or seller default are included.

Think the biggest risk is insulating yourself from 3rd parties (like lenders, appraisers and inspectors) that you have no control over.

Some times with experience, you can see from the get-go it's a steal.  Sometimes you can take a walk-thru immediately before submitting an offer.

[David Braun]

Originally posted by @Adrie Moses-bailey:

Unless 1) you have a lot of money, 2) you are buying so below market it doesn't matter or 3) you negotiate a very low deposit then I would not offer from day 1. I would think they are offered only once the PSA is signed by which time you should have the DD materials to know if you want to make an offer. Any reason you can't put a badboy carveout (fraud),title or environmental carveout into the EMD agreement?

I am sure everything is able to be customized and exclusions/carveouts added. I need to discuss this with my attorney. Question is, what's acceptable... Thanks for chiming in!

[Adrie Moses-bailey]

@David Braun, out of curiosity, are all the investors in your syndicate accredited? Wondering if they all need to be, I was just reading that the reporting requirements for having non-acc investors are so steep that it kills the benefit and am wondering if that is true from anyone with experience.