Minimizing Earnest Money For Wholesalers

Many real estate investors are attracted to the lure of no money down – to invest in real estate without risk, or without using any of their own money.

So if you are going to wholesale real estate deals to other investors, how do you actually accomplish that with no money down or at least none of your own money, when most sellers are going to want to get some earnest money? That’s what I will be covering in this article.

Without giving you legal advice or boring you with technical jargon, earnest money is money that you put up with a contract to purchase real estate to show the seller that you are serious about buying their house. Usually, if you fail to perform according to the contract (in most cases that means buy the house), the seller gets to keep the earnest money you put up with the contract.

Often real estate investors put up as little earnest money as possible. However, remember that larger earnest money deposits can show your level of seriousness to a seller, which could translate into the acceptance of your offer over similar offers accompanied by less earnest money.

So, when we are wholesaling real estate, how do we deal with earnest money?

First, when we are wholesaling a contract, I like to try to negotiate to have the earnest money due after the inspection period. By the end of the inspection period, we should have our investor buyer lined up and we will ask them to put up the earnest money to show that they are serious about closing the deal.

Second, how much should we put up as earnest money? In most cases, if you are buying, you are trying to put up as little as possible. If you are selling, you want the buyer to put up as much as possible. So, when we are wholesaling, we may try to negotiate the amount that the seller needs to the lowest possible. But, when we try to get our investor buyer to commit to buying, we’d like to get as much as possible to ensure that they will be closing.

As a final option, some investors even use promissory notes as earnest money. You should consult your legal adviser to determine the laws in your area about using this strategy.

Until my next post,

James

P.S. If you are interested to learn exactly how to wholesale properties for some of the fastest cash flow you can generate in the real estate investing business sign up for our Real Estate Investor Bronze Membership.

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