Do you really need to pay earnest money or can you assign the contract without it?

Question

I have a few questions about wholesaling scenarios. So let's say I have a deal in the works but I don't have the earnest money deposit needed to secure the contract. It's a rental property (duplex) with tenants in place, paying rent on time, and doesn't need repairs.

1. Could I just assign the contract before the earnest money deposit is due and not have to pay it?

2. Is it possible (and legal) to use the end buyer's deposit to pay for it (if so, would you have to disclose this to them?)?

3. Would the better option just be to bird dog the property instead of trying wholesale it?

Thanks!

J Scott · Answer

I'm not arguing the literal truthfulness of this statement (I honestly don't know it's true or not), but practically speaking, when would this be an issue?

First, how would an end-buyer know if his funds were being used for the C->A or the C->B transaction?  And second, why would he care?  He's getting the property for the agreed-upon price and presumably, he knows it's a wholesale deal.

J Scott · Answer

A couple thoughts:

1.  Why not negotiate an earnest money deposit that you can always afford?  For example, $10, $25 or $100.  That way you don't have to stress over it.

2.  Earnest money is not legally required to create a binding contract, but if you ever go in front of a judge, having it will make your contract look more professional.

3.  You can always state in the contract that the earnest money will be paid at a later date (for example, upon completion of inspections, after 2 weeks, whatever...).  Then you have extra time to get the money or find a buyer to put up the money.

4.  There are no requirements for where you get the EM and you don't need to tell the seller where you're getting it.  So, if you want to get it from the end-buyer, go for it.  Just make sure you are abiding by the contract in terms of when the EM is due and to whom.

Bill Gulley · Answer

Easily said; parties hereto agree that the earnest money made in connection with this PA shall be deposited to the escrow account of Duey Chetum & Howe, attorneys at law, 12345 9th Street, Anytown, State and shall be applied to the purchase price at the time of settlement or disbursed as further agreed to herein.

You may have issues keeping earnest money, local custom and state law dictates the use of EM on contracts.

EM is returned in the event a seller fails to perform, unable to provide good title for example which is not known until settlement. EM is usually required to be held in escrow as well, common practice and may well be a requirement. Using or spending an EM deposit  is really bad practice. However, you could assign an earnest money deposit.

Contract extensions are usually contained in the body, common for title and lending requirements. Automatic extensions are not done for either party, extensions are negotiated and your contract must initially have a stated term.

Curt, there are old scams attached to non-refundable EM deposits, they are not down payments, but consideration for the contract. You could knowing contract with someone who can't qualify, take the EM and later kill the contract. It's not common practice and don't forget the reputation issues in an area. I'd urge you to become more familiar with accepted practice and legal matters before getting creative. We can't do just anything we can dream up.

Tom, seems I've read that language before, LOL Statute of Frauds governs RE contracts as J. Scott pointed out.

Also, EM is an issue to a lender, you don't need to disclose the source of funds to a seller, you do need to disclose to the lender, the question is on the 1003 application, "is any part of the EM or down payment from borrowed funds".

If you don't have cash for the EM, I'd suggest you not waste time with REOs or get a partner with cash. :)

Curt Smith · Answer

I have 3 purchase contract issues I need advice on:

1) how to say earnest money is held by the closing autorney?

2) how to keep earnest money going hard (non refundable) ?

3) Today inventory is low so selling a good deal in 30 days is usually possible but what clause do I put in the contract that makes it easier to extend the contract?

Is it common to put in your contract to the seller that EM is held by "John Doe closing autorney, 123 Main st,  Phone number, escrow account 1234"

This is what I'd like to do in my standard purchase contract so I just point and say this is our company's standard practice.  Just call the autorney and check that we have $NNN in that account.

I'd have $1k in that account at all times.

I'd like a systematizable strategy to do volume purchases and not deal with individual checks, loosing earnest money of the buyer takes longer to close etc?

Bill Gulley · Answer

To the OP, your number one and two can be yes, it depends on how your structure your deals, you don't have to use your money.

As to consideration, in RE contracts the good faith evidence and the value is reflected in the earnest money deposit more so than other types of contracts dealing in smaller values with personal property. Your car dealer may take a ten dollar deposit.

Bottom line, your ability to enforce a RE contract will be much better with having paid significant consideration as opposed to a ten dollar bill. It shows the value of the contract to you as a buyer, if it's just a dime, no judge is going to see that as a serious value in and to the contract and may simply dismiss your claims against a seller to force any agreement.

If your seller never complains, if all goes well and there are no real mess ups, you really don't need to put a ton of money down. I have used earnest money notes many times on deals that I knew would or should fly through on my side. Just know, if you use a note and you default, you can be held to pay the note amount. :)

J Scott · Answer

Real estate contracts generally fall under more rigid requirements than other types of contracts.  For example, as related to the point above, at least in my state (and I believe in all states), verbal acceptance doesn't create an executory real estate contract -- for a binding real estate contract, you must have a written and mutually signed agreement that has been received by all parties.  In fact, if you send me a signed real estate contract and I sign it and throw it in a drawer, but don't return the signed copy to you, it isn't executory/binding -- only when all parties have received the signed copy is the contract legally binding.

There are some other places where real estate contract law deviates from basic contract law (again, almost always more rigid) -- it's worth doing a little research for anyone who will be transacting real estate.

Tom Goans · Answer

Elements of a Legally Binding Contract

An agreement/contract must contain essential elements to be regarded as a contract. If any one of them is missing, the agreement will not be legally binding.

Moreover, the parties to a legally binding contract must be considered "competent persons" having legal capacity who exchange "consideration" to create "mutuality of obligation".

Offer

There must be a definite, clearly stated offer to do something. For example: A quotation by sub-contractor to the main contractor and an offer to lease.

An offer does not include ballpark estimates, requests for proposals, expressions of interest, or letters of intent.

An offer will lapse:

• when the time for acceptance expires;
• if theoffer      is withdrawn before it is accepted; or
• after a reasonable time inthe circumstances (generally the greater      the value of the contract, thelonger the life of the offer).

Acceptance

Only what is offered can be accepted. This means that the offer must be accepted exactly as offered without conditions. If any new terms are suggested this is regarded as a counter offer which can be accepted or rejected.

There can be many offers and counter offers before there is an agreement. It is not important who makes the final offer, it is the acceptance of that offer that brings the negotiations to an end by establishing the terms and conditions of the contract.

Acceptance can be given verbally, in writing, or inferred by action, which clearly indicates acceptance (performance of the contract). In any case, the acceptance must conform to the method prescribed by the one who made the offer for it to be effective.

Intention of Legal Consequences

A contract requires that the parties intend to enter into a legally binding agreement. That is, the parties entering into the contract must intend to create legal relations and must understand that the agreement can be enforced by law.

The intention to create legal relations is presumed, so the contract does not have to expressly state that you understand and intend legal consequences to follow.

If the parties to a contract decide not to be legally bound, this must be clearly stated in the contract for it not to be legally enforceable.

Consideration

In order for a contract to be binding, it must be supported by valuable consideration. That is to say, one party promises to do something in return for a promise from the other party to provide a benefit of value (the consideration).

Consideration is what each party gives to the other as the agreed price for the other's promises. Usually the consideration is the payment of money but it need not be; it can be anything of value including the promise not to do something, or to refrain from exercising some right.

The payment does not need to be a fair payment. The courts will not intervene where one party has made a hard bargain unless fraud, duress, or unconscionable conduct is involved.

Formation

In addition to the elements of a contract:

• A party must have capacity to contract
• The purpose of the contract must be lawful
• The form of the contract must be legal
• The parties must intend to create a legal      relationship
• The parties must consent

As a result, there are a variety of affirmative defenses that a party may assert to avoid his obligation.

Contracts May Be Bilateral or Unilateral

A bilateral contract is an agreement in which each of the parties to the contract makes a promise or set of promises to each other. For example, in a contract for the sale of a home, the buyer promises to pay the seller $200,000 in exchange for the seller's promise to deliver title to the property. These common contracts take place in the daily flow of commerce transactions, and in cases with sophisticated or expensive promises may involve extensive negotiation and various condition precedent requirements, which are requirements that must be met for the contract to be fulfilled.

Less common are unilateral contracts in which one party makes a promise, but the other side does not promise anything. In these cases, those accepting the offer are not required to communicate their acceptance to the offeror. In a reward contract, for example, a person who has lost a dog could promise a reward if the dog is found, through publication or orally. The payment could be additionally conditioned on the dog being returned alive. Those who learn of the reward are not required to search for the dog, but if someone finds the dog and delivers it, the promisor is required to pay. In the similar case of advertisements of deals or bargains, a general rule is that these are not contractual offers but merely an "invitation to treat" (or bargain), but the applicability of this rule is disputed and contains various exceptions.

In certain circumstances, an implied contract may be created. A contract is implied in fact if the circumstances imply that parties have reached an agreement even though they have not done so expressly. For example, a patient may implicitly enter a contract by visiting a doctor and being examined; if the patient refuses to pay after being examined, the patient has breached a contract implied in fact. A contract which is implied in law is also called a quasi-contract, because it is not in fact a contract; rather, it is a means for the courts to remedy situations in which one party would be unjustly enriched were he or she not required to compensate the other. Quantum meruit claims are an example.

Account Closed · Answer

Ned,

What I was saying a lot of people want to used a end buyers funds to closed A & B transaction which can come back to bite them if the end buyer does not agree with it.

Joe Gore

Ned Carey · Answer

@Brandon Franklin  good wholesaling practice says you get at least as much EMD from your end buyer as you give to your seller. With a delayed earnest money deposit as @J  Scott says that should solve your problem.

I am not sure what @Joe Gore is referring to. If he is referring to a double close, that would depend on state law, (and it not the question at hand). If he is referring to the end buyer putting up the EMD I strongly disagree.

Again I do not know what Joe is specifically referring to here but his wording "get away with it" implies that creative techniques are somehow illegal or perhaps unethical. I strongly disagree with that position.

Good luck - Ned

Account Closed · Answer

Brandon,

If you do find a title and escrow that will allow you to used the end buyers funds the escrow/title could lose their license if the end buyer find out and it would be a big mess. brandon please dont read all theses books saying you can do it and get away with it.

Joe Gore

Do you really need to pay earnest money or can you assign the contract without it?

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