Learning the trade, Earnest Money Deposit?

[Jerome Harrod II]

How does earnest money deposits works? As I was reading, I saw that when dealing with new buyers many wholesalers had made the buyers pay an earnest money deposit. Is this a recommended practice? Why? How much do I ask for when requiring a earnest money deposit?

The reason is that I'm looking to expand with dealing with notes as a broker into wholesaling real estate as my entry to being a real estate investor. I took Financexaminer's advice to read through key points in Wests Business Law Text book, and I feel as though have a better grasp on Laws and ethics.

Now to start, I have been researching the art of wholesale here in BiggerPockets, and boy was there alot to read and learn. I even expanded to outside resources such as the library and other internet resources to solidify information and get more perspective of wholesaling.

I feel I got a grasp on how the wholesaling process works in terms of finding buyers and the homes when dealing directly with the home owner. However, I don't feel comfortable interacting with realtors until I'm more experienced. I think I need to somehow make a script to study so my answers to those hard questions won't begin with "uhh" and end with "umm".

What I don't know are the little gaps in information, such as How do I pre-screen a buyer to see if he's good? or How do I introduce myself to a potential prospects?. Another question was how do I start wholesaling "virtually"?

I know I have a bad tendency of over explaining myself and I asking alot of questions, so to start somewhere basic, Could someone explain Earnest Money Deposits?
I mean, If you have the answers to my other questions then by all means I ask for the answers plus tips. I'm looking to absorb and retain any and all quality information, to learn everything I can to be successful.

[J Scott]

Originally posted by Bryan Hancock:

I put $10 earnest money down on all of the distressed properties I buy. To my surprise I recently got a trumped up demand letter for a property I bought subject-to where the opposing attorney claimed $10 was not sufficient consideration.

Reading through my wife's real estate textbooks, it is made very clear that for a Purchase & Sale Agreement, the consideration is NOT the earnest money deposit.

Here is the exact text from the Georgia MLS Training Institute, which provides prelicense training for Georgia real estate agents:

"In a real estate contract, consideration is NOT the earnest money, but the exchange of the purchase price (or something else of value) for real property."

(Note the capitalization of the work "not" above was theirs, not mine)

Reading further through the text, it's clear that earnest money -- while a good idea -- is not required for either a valid or an enforceable real estate contract.