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.
You’ve probably heard it before, but everything is negotiable. As someone who has dealt with literally hundreds of real estate agents in markets all across the country as well as thousands of real estate investors, I see and hear many strange things.
It amazes me what some investors think they can do and it amazes me even more what real estate agents and brokers don’t think can be done.
Let’s talk about Earnest Money as an example. I’ve talked to a handful of real estate agents that believe you can never put a house under contract with just $20 in earnest money. Not true.
I’ve done it. Dozens of people I personally know have done it. Can it be done via the Multiple Listing Service (MLS) when working with real estate agents? Not usually. However, earnest money is completely negotiable and can be used to show that you are either a weak or a strong buyer.
If you go to a real estate agent to write an offer to buy a house and you tell them that you want to put up $20 (or some other ridiculously low amount) as earnest money, I would not be surprised if they told you to work with someone else. If you were my client, I would not want you wasting my time–especially at $4 per gallon for gas–taking you to see properties only to have you show the seller you’re really not serious when making an offer to buy.
Putting up a fair amount in earnest money can show that you are a serious buyer. If you are presenting a similar offer to another buyer with a larger earnest money deposit, you have a better chance of getting your contract accepted and buying that property.
Does that mean that you need to put the money up when you write the contract? Not necessarily. Talk to your agent or broker and find out if you can write the offer and have the earnest money due within a few days of having the offer actually accepted.
If you are actively investing and making multiple offers, it really helps to conserve your cash and only pay earnest money after a contract is accepted. I recommend this to investors that write contracts with me in my market. This is especially true with short sales and bank owned (REO) properties because it can take weeks, or even months, to find out if a contract has been accepted.
So, while you may be able to put a house under contract with very little in earnest money, it is NOT the norm when buying through the MLS and shows that you are not serious about buying. Rely on the experience and knowledge of your local real estate agent to discuss the benefits and downsides associated with the amount and timing of earnest money in your particular market.
Until my next post,
James
P.S. For our Real Estate Investor Bronze Members where I teach strategies for buying properties outside the MLS by using marketing it is a very different situation and relatively low earnest money is the norm not the exception. Sign up for Real Estate Investor Bronze Membership to access our extensive training collection of over 100 topic specific real estate courses plus on-going training and consulting sessions.
