Earnest Money, how much to put down.
This is an interesting topic. There has been many debates on how much one should put down as earnest money when buying real estate. This is a matter of your position in the transaction and who you are buying from or selling to. Let’s go ahead and break down each position. We will assume we are buying a single family home.
INVESTOR buying from NON-INVESTOR
First let’s say you the investor is buying from a non-investor. Just a regular home owner. Let’s assume that the home owner has bought and sold many homes in the past and understands this process. There will be times that the seller will ask you to put up a good amount of earnest money. In their mind (which I can see their point) they want to see that you are serious by putting up a good size earnest money. Of course “good size” is a matter of perspective however I have experienced and others have too that $500 has been a good number to show seriousness. Once in a while you will have one that will want more. It has been rare for me to put up $500 earnest money however I don’t mind if the deal is that good. It truly is about the deal. Earnest money should not be the reason you loose on a deal that will make you thousands of dollars. In my experience regardless of the experience of the seller I have placed as little as $10 as earnest money. To the seller the amount of earnest money doesn’t matter as long as they get what they want (or got rid of the property) and the transaction will close.
I believe there really is not much debate here. I believe most investors would pretty much agree with the above paragraph. Now we see how it is a little different buying from another investor.
INVESTOR buying from another INVESTOR
Buying from another investor could be different depending on the relationship between the two investors. The relationship (or lack thereof) does have an effect on the amount of earnest money that will be asked or be required. A good example is two friends who are investors would generally ask for a small amount like $500 as earnest money. Some as little as $100. I don’t recommend a very small amount however it does happen. Now say the two investors are not friends, no relationship to speak of. I have seen and have done this myself ask for $1,000 (or higher) for earnest money.
There is no real rule of thumb here as to what you as the selling investor should ask/require as earnest money. You must decide if this will be part of your process in increasing the success rate of closings. Here is what I mean. An investor that doesn’t complain about a non-refundable $1,000 earnest money is, in my eyes, a confident investor that will work hard to make sure the transaction closes. Others might beg to differ on this point however just think about the message sent by that investor buyer. He is saying “no big deal”. He knows he will close. Of course nothing is 100% but the success rate will be higher.
I have spoken to other investors who would ask for $2,500 non-refundable earnest money. I asked why that is. The answer was they want serious buyers only. This goes back to the example above. I do see that point. It does make sense.
What would you do about investors who will not, no matter how great the deal is, place no more than $500 non-refundable earnest money? Great question eh? The answer here will definitely vary from investor to investor. I see it as this, if the deal is great there will be MANY other investors out there that will not mind fulfilling your earnest money requirements. Those who will do it are experienced enough to see that the deal is great and they are very capable of close without having to worry about losing their earnest money.
How about his one…..
INVESTOR buying a property on the MLS
This at times becomes a sore point to some. I do have a real estate license so I have the luxury to be able to browse thru listings. I do not know how many times I have seen statements like “Offer must be accompanied by $xxx earnest money.” So this means that if you are the type that doesn’t like to put a lot of earnest money down then you will more than likely skip over that listing. One thing that I find true is that that requirement is not always set in stone so don’t skip the listing. Call the agent and make the offer and work out that earnest money deposit.
Some agents do think you should put down at least $500 earnest money. To them you are not serious if you don’t. That really should not be their call. They should always present the offer regardless. But don’t be surprised if you receive resistance from agents who think your earnest money should be a certain dollar amount.
Earnest money, how much should you put down? Does it really indicate you are serious if put down more? The answer is truly about perspective, your position in the deal and the deal itself.
TIP…don’t let the earnest money get in the way of a great deal. Make the deal work. You will get that earnest money credited anyway once you close.
Please do comment on this article. Any tips will be appreciated. I don’t mind if you share this with others. I hope it helps.
John Morey (author)
Real Estate Investor (Northern Alabama)
www.alabamaaffordablehousing.com
256.469.3099
Comments