Posted by Tim Fierro (Tacoma, WA) on March 01, 2002 at 15:02:04:
pain in the ‘abs’.
It’s not your stomach, the other side. 
EARNEST MONEY??? - Posted by Gary O
Posted by Gary O on February 28, 2002 at 11:00:10:
I’m a newbie and am getting ready to make my first offers, but I have one question about earnest money. I heard that one person, can’t remember name, puts a thousand dollars in an escrow account and uses this same thousand dollars for every offer he submits. First, hows does the earnest money work? When you make an offer do you give them a check with it? Dumn question, but I’ve never done this. What is the paper work involved? Second, if I were to set up an escrow account would that be with an attourney or a bank? What paper work would then be involved with securing your offer with the money in the escrow account? Any additional insight I think I could use.
Thanks again in advance CRE community!!!
~Gary
Re: EARNEST MONEY??? - Posted by Rob (IN)
Posted by Rob (IN) on February 28, 2002 at 15:21:09:
I’m just curious why some investors believe the amount of earnest money has an affect when working through a realtor? By law, all realtors are required to present all offers to the sellers. Would it not make sense the realtor would put more emphasis on the purchase price and terms? Just curious if others had some adverse experience with realtors and earnest money.
Personally, I believe earnest money like everything else in the contract is negotiable. I have even offered $100 earnest money in the form of a promissory note payable upon closing.
Re: EARNEST MONEY??? - Posted by JoeS
Posted by JoeS on February 28, 2002 at 14:01:08:
Good answers by Scott and Matt. I am in NY also, and in this state, only $1.00 is legally needed as earnest money. Check your state laws. I normally do not give the earnest money to anyone except the Title company that will do the closing. Realtors will try to get it as assurance that they will get paid their commission. If a Title company is doing the closing, they HAVE to by law pay out all the money that comes into their escrow account for that closing. Every payment is accompanied by a pay letter. No money can be left over.
If you try to use the same $1,000 for each offer, the Title company would be in deep **** if they were ever audited!! Five offers accepted, five checks had better be in the escrow account.
It is Steve Cook… - Posted by Nathan(oh)
Posted by Nathan(oh) on February 28, 2002 at 12:46:59:
that uses that revolving escrow account.
I usually make an offer and list the earnest money in it, and add “to be submitted upon acceptance.”
That way, you can send multiple offers without sending multiple checks.
If you are making offers to individual sellers, negotiate or start with the lowest earnest money you can. For houses on the mls, more earnest money bears more weight, but the other poster is right in saying $500 is about average.
To use the escrow account, you will have to develop a relationship with an attorney. They would also handle the paperwork. You will be charged based on how many transactions you have in that account.
Hope that helps.
Nathan
Re: EARNEST MONEY??? - Posted by matt
Posted by matt on February 28, 2002 at 12:23:21:
Earnest money is money that is given to your attorney or the sellers attorney that shows the seller that you are interested in purchasing the house. It also ties up the house so the seller can’t sell it to somone else for a specified length of time.
I am in NY and a newbie myself. However, my lawyer said that $100.00 should be enough to tie up a house. My lawyer handles one of the biggest developers in my area and he said that you only put $1000.00 down as earnest money for million dollar deals.
Of course it all depends on the seller. If the seller wants a $1000.00 to tie up the house, then that’s his call. if he will take $10.00 that’s up to him.
I would add a clause to your contract that states that your earnest money is refundable if certain conditions are not met, then write down what those conditions are.
Hope this helps.
Regards,
Matt
Re: EARNEST MONEY??? - Posted by Scott
Posted by Scott on February 28, 2002 at 12:12:27:
Are you making an offer to a FSBO? If so, never offer so much earnest money. I usually start at $10. If they want $1000, which I would never offer, I would start to ask why. If you are making an offer through a realtor, that’s a different ball game. Here $500 is typical. If you want your offer (through a realtor) to a snowball’s chance of being accepted, it needs to be as clear of contingencies as possible. I state this assuming that you are offering well below the offering price.
Re: EARNEST MONEY??? - Posted by Tim Fierro (Tacoma, WA)
Posted by Tim Fierro (Tacoma, WA) on March 01, 2002 at 02:33:49:
As an agent, and working for the seller, if you don’t follow through with the deal; I want to keep your earnest money if possible.
Deal last month went like this.
$185k price (We wanted $185k)
$2k earnest money (negotiable, and they offered $2k)
7 day inspection contingency (They wanted 14)
10 day financing contingency (They wanted 30)
About 30 days til closing
After a few days, I got their list of things to fix. We said we were not going to fix anything and sent it back. They released the inspection contingency and were willing to let it go.
On the 10th day, I told them to send over their financing contingency release, or the deal is dead. They sent it over.
2 days before closing, they had a problem with financing and wanted a week extension. I talked to the agent, the mortgage broker, and the title company. THEN I talked to my client. I told them they could keep the $2k if they don’t close in 2 days, or we could give them an extension and this deal will close in a few days. We gave the extension for 3 days and it closed on that 3rd day.
So you see, my clients could have received that $2k and walked away, but the deal was going to happen, so it is in their best interest to proceed and let the buyer have a few days.
When I found out the details of why they needed an extension for a few days, it was clear the deal would go through with more time. However if I would have received no information, financing problems, or anything that would stall this deal, I would have told my clients to let the 2 days ride out on the contract, and then take the $2k for their trouble with this buyer. It didn’t go that way, but it could have.
As a seller, you would like to get as much as you can to eliminate those who may not be as serious, but the terms of the deal overall is what sets it all in motion.
If someone offers $1 earnest money and wants to close in 3 days, I bet you wouldn’t care how much the earnest money is. If the offer is $1 earnest money, an inspection contingency, a financing contingency, and a closing date 60 days from now; you may not do the deal if the buyers are not willing to put up anything for risk.
BTW, as another pointed out with escrow companies; no paperwork, no payments. When I work with sellers, I prefer having the money go to the escrow agent. This way if we are legally entitled to the money, it needs to be released, or nobody is going to get it for a while. When I work with a buyer, I want the earnest money to come into the office since we have control over the money in case a deal defaults. Then we can decide if we have a legal stand to keep the funds for our client/buyer or not.
Have you ever been a seller? - Posted by Ron (MD)
Posted by Ron (MD) on February 28, 2002 at 15:49:43:
Rob, if you’ve ever sold a house, you know that you want more than a contract…you want a nice warm feeling that the buyer is going to make it to settlement. You want him to be qualified, which is easy enough to do. You also want him to be committed to going the distance. The larger his deposit, the more likely he is to get to settlement. It’s real easy to walk away from a $100 promissory not payable upon closing. Finally, you want your buyer to be solvent (i.e., have some money). Earnest money is one way to demonstrate that you (the buyer) are more than just another flaky wannabe investor hoping to flip the deal.
You raise the point about RE agents being legally bound to present every offer to a seller. That may be true, but there are two problems. First, some sellers will give their agent a specific instruction to show only offers that meet certain criteria. (I suspect a $100 promissory note may not meet those criteria.) The agent can legally follow those directions and not present those offers not meeting the seller’s criteria. More importantly, even if an agent does present every offer, he also will usually offer an opinion. For example, he might say “I’d stay away from this one…this guy can’t even pull together $500 for earnest money.”
As I’ve said before, I’ll give whatever earnest money it takes to make the deal work. I’m a cash investor and I’m relatively indifferent if I come up with the money today or a month from today. I often ask the listing agent if the seller cares how big the deposit is. Sometimes, I’m told that $500 is fine. Once I was told $10,000 would get their attention. I currently have a pending offer of $6,000. My earnest money? $6,000. I’d love to get the house at that price and if I have to pay the opportunity cost of $6,000 for 30 days, I’m happy to. The last thing I want is the listing agent to say to the seller, “This guy came in with a lowball offer and he’s proposing a $100 deposit…payable via a promissory note…can you believe this guy?”
Ron Guy
Re: EARNEST MONEY??? - Posted by Gary O
Posted by Gary O on February 28, 2002 at 14:25:17:
Thanks everybody for the response. Most of the places that I want to make offers on are listed in the MLS. On the listing the mojority of them say that they want $1,000 earnest money. I really don’t have a problem putting up the $1,000 IF I get that $1,000 back if I don’t buy OR that $1,000 goes towards the purchase price if I do buy. Do I need to always put a contingency in the contract if I don’t buy? Also if I don’t use an attourny do I just staple a check to the contract offer and submit it to the agent? I know this is really a dumn question again but I just would like to be as prepared as I can when I start submitting offers. One more question, if they are asking for $1,000 earnest offer does that mean that I SHOULD just give it to them? I know what you guys are saying about the $1,000 being to much.
Thanks y’all!!!
~Gary
Re: Have you ever been a seller? - Posted by J. Clifton
Posted by J. Clifton on March 01, 2002 at 23:14:17:
You’ve gotten great responses, but may need one that’s shorter and sweeter:
-
Avoid the problem upfront by doing initial deals with MOTIVATED FSBOs, then document your buying track record with your subsequent offers on houses listed by MOTIVATED sellers. The MAJOR issue is your ability to perform; if you establish that upfront, you have leverage regarding a low (or even no) EMD with truly motivated sellers, pooh-poohing agent or not.
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Make your EMD sizable, but payable upon/after acceptance. It could be delivered on a step-up basis ($100 on acceptance, say a $900 balance upon settlement) to give the ‘bottom line’ appearance that you are putting up $1,000+.
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To not actually dispense the money, while circumventing the poor appearance given by a promissory note, you could try one of Steve Cook’s ideas and have your attorney hold your funds in a trust account, and stipulate the deposit will be held by that closing agent through escrow.
Re: Have you ever been a seller? - Posted by SCook85
Posted by SCook85 on March 01, 2002 at 11:26:35:
Ron,
You have some great information in these posts that I can definitely relate to. I do just want to add that when selling a home, getting contracts from buyers on it usually isn’t a problem. Getting the buyers to the settlement table is where the problem comes in and your points about earnest money should be well taken and received by all on this board. I usually reject offers where the deposit is less then $500 immediately. I don’t even counter with asking for more earnest money. I just reject the offer.
As a seller I want someone to show me that they are serious and capable right up front.
Happy Investing,
Steve
Re: Have you ever been a seller? - Posted by Eric
Posted by Eric on February 28, 2002 at 17:24:06:
How would you recomend someone go about flipping properties that is a beginner and has very little capital to begin with? Isn’t flipping a good way for a broke begginer to start out? I got a different impression from you when you said “Earnest money is one way to demonstrate that you (the buyer) are more than just another flaky wannabe investor hoping to flip the deal”. What should I do about earnest money when I flip my first house? Thank you. -Eric
Re: EARNEST MONEY??? - Posted by JoeS
Posted by JoeS on February 28, 2002 at 14:41:18:
Will you get it back if you do not buy? That depends on the wording in your purchase contract that both you and the seller signes. Mine ALWAYS states that “in case of default by Buyer, the Seller will retain the earnest money deposit as the ONLY remedy. In the event of default by Seller, the Buyer may pursue any and all legal remedies available.” I never use an MLS purchase contract…way too “pro seller.” The seller will have an earnest money deposit deposited with MY Title company only after the offer has been accepted and signed by all parties. That way, I do not have to chase down checks if they do not accept my offer.
One realtor keeps a new $1.00 bill with my name on it so they can submit an offer if I fax it in. They know from past dealings that I WILL bring in a check for the agreed upon amount upon acceptance. The $1.00 makes it legal.
Odd… - Posted by J. Clifton
Posted by J. Clifton on March 01, 2002 at 23:44:38:
I thought I was responding to Gary O.'s post, yet it ended up under Ron MD. Go figure…
You wouldn’t take a $100 promissory note?! (NT) - Posted by Ron (MD)
Posted by Ron (MD) on March 01, 2002 at 16:22:18:
nt
Re: Have you ever been a seller? - Posted by Rob (IN)
Posted by Rob (IN) on February 28, 2002 at 19:45:19:
Eric,
I would suggest you do a little browsing on this board and get a wide range of opinions on the subject. Try the search engine on this site and review some of the experts response (just a warning there are quite a few postings, as this is a popular subject!). I think you can see from Ron?s and my responses, real estate investors take different approaches to investing based on their needs, personal situation, their investing goals and most importantly based upon the investing environment/market. This is why I would suggest disregarding the previous comments and absorb the full range of investor?s techniques/comments on this web site before making a decision on which approach would work best for your particular situation. You may even want to consider checking out a local real estate investing club. The majority of investors are not PITA, and would take the time to answer your questions to the best of their ability. Finally, there will be no substitution for just getting out there learning what works best in your market.
Re: Have you ever been a seller? - Posted by Ron (MD)
Posted by Ron (MD) on February 28, 2002 at 18:35:00:
Eric,
The original post related to making offers on properties listed with realtors. This means you have a RE professional (although some would dispute that characterization) involved that knows the potential problems with buyers. He’s likely to caution his seller against taking an offer from someone who has red flags as respects his ability to get to closing (e.g., small deposit or, worse yet, a promissory note in lieu of real deposit). If you’re talking about flipping, your sellers are most likely to be banks…meaning you have a professional seller and a professional intermediary, making it very difficult to get away with a $100 deposit. They want to separate buyers like you from buyers like me. Now I don’t mean that in a disparaging way, but I can show them that I have the cash sitting in a bank account and am going to settlement to fix it myself. You, on the other hand, hope to find a buyer who will go to settlement. Banks and realtors don’t like to bet on that hope. They’ll usually take a lower offer from me to avoid that risk.
What can you do about it? Well, ideally, you can come up with $500 for earnest money. They won’t be impressed by that, but they won’t be spooked by it either…if you’re dealing in low end properties.
If you can’t come up with $500, you’re probably spinning your wheels trying to work in this arena. You will be better off looking for sellers not represented by an agent. Why? 'Cause they are either naive to the risks of taking a small deposit or they are desperate…or both. By the way, these sellers may be better prospects anyway because you aren’t competing against every other investor in town who has access to MLS listings. Obviously, it takes more work (i.e., marketing) to find these sellers, but the opportunity per deal is probably greater.
You also asked about whether flipping is the best place for a beginner to start. That is, of course, the conventional wisdom. It takes little money (especially compared to doing rehabs), has less risk (because you aren’t subject to the uncertainties a rehabber is), and less headaches…you don’t have to deal with contractors, buyers, lenders, inspectors, etc. The problem is, at least in my personal experience, that flippers don’t have a clue what they’re doing and routinely sell properties for more than I can buy them. As a rehabber/customer, I expect a wholesaler to know the numbers for his deal…what’s it going to cost me to fix it and what’s the ARV. The large majority of wholesalers that call me either don’t know these two critical numbers, or they lie about them. Bottom line, they pitch a deal as much better than it really is. I don’t waste my time with them anymore. I’m convinced that the number one customer for a wholesaler is the rookie rehabber…he believes their optimistic numbers and isn’t sure how to find properties himself.
I’ve said before that I’d love to have a good wholesaler to buy from. I almost always wish I had more houses than I do. Right now, I’d buy five houses if I could…at the right price. But, to be a good wholesaler, you have to learn how to estimate repairs and you have to know (or know how to figure out) the ARVs for your market. Neither of those is rocket science…in fact, they’re both pretty simple. I realtor can give you the info you need to figure out ARVs…it’s fairly “common-sensical”. It’s trickier to learn repair costs. The best way is if you can get a generous rehabber to take an hour and tell you how he does it. Another way is to find a contractor who works for investors and pay him to show you. The problems are some rehabbers are like me (i.e., jerks) who are reluctant to teach new guys how to do this because it makes you a better competitor for the same deals I’m going after (assuming we are both buying from MLS and both working in the same area). I’ve got enough competition for fixers in my area, I just don’t want to encourage more folks bidding against me. (And, newer investors are often willing to pay considerably more than I do…at least for the first deal.)
It’s also tough to get a contractor to explain pricing to you because contractor prices are highly variable. When I’m getting bids from new contractors, the bids for a $15k job can range from $13k to $30k. If you learn from the $30k contractor, you’ll price yourself out of the market.
Bottom line, Eric, flipping is a fine place to start if you take the time to learn what you’re doing and you work to find real deals for investors. Otherwise, it’s going to be tough finding regular customers (you can only burn a rookie once, then he turns his sights to Amway).
So, Eric, I’ve rambled quite enough. I hope that helps you a bit. I don’t mean to discourage you or characterize you as a flaky wannabe, just explaining how I think most Banks and RE agents would view a buyer offering a $100 promissory note as earnest money.
Ron Guy