Today’s question comes to us from Jessica R. from Philadelphia, PA. She writes,
So I’ve been following your podcasts and YouTube videos. And after watching one of your videos I’m preparing to get a deal in the next 90 days. So I’ve already set up some appointments and the question I have is about the earnest money deposit and how to negotiate that if I’m not planning to give a substantial, if any sort of earnest money deposit at all?
Great question Jessica!
I tend to believe that the issue of earnest money is largely a question of “Custom and Confidence.”
If it is a custom to have a substantial earnest money deposit on something like a MLS (Multiple Listing Service) property, then it will be difficult to negotiate a lower deposit because the listing agent’s job is to get a high one.
However, if it isn’t a listed property, then there really isn’t a “customary” earnest money deposit. Instead, it is negotiable, and is largely a measure of the Seller’s CONFIDENCE in you.
In my practice at KarlBuysHouses.com I do not offer a large earnest money deposit on unlisted property. My best practical advice is to act “As If” you do this every day. Be confident!
The earnest money is simply a sign of good faith that you will do what you say you will do.
The beauty of buying property as in investing agent, or wholesaler is the simplicity of our business. A seller who is motivated to sell to an Investor is generally more concerned about the certainty of close rather than a large earnest money.
To put it simply, a motivated seller wants your offer, not your earnest money!
If your intent is to offer less than what would be considered “normal” in your area, (remember, normal is a subjective term!) then the first thing you must do is present your offer with confidence!
This would include a well written contract (I use a state contract approved by the local association of Realtors®), preferably typewritten. The reason for this is because a well written contract (especially on a Realtor® contract) is very compelling.
Nothing is worse than a 2 page, hand scribbled contract that is handed over to a skeptical seller. Don’t underestimate this very important part of the wholesaling puzzle!
Next, I would ensure that my earnest money ($10) is pre-printed on my contract. This will help assure the Seller that this is part of the normal process.
Remember! Most Sellers only complete this process every 5-7 years, and in an wholesale investment property scenario, the earnest money is often the last item considered!
Finally, emphasize the strengths of your offer, and ignore the earnest money issue! More often than not, the objections that come up in our head never come up in real life! You have a lot to offer here!
Emphasize the strengths of your offer including:
- Fast closing (Very helpful if facing foreclosure!)
- As Is, Where Is Sale (Needed when they do not have the money or will to repair!)
- No commissions (Save money!)
- All Closing Costs Paid (instead of the buyer asking for closing costs, you pay theirs!)
When you point out the strengths of your offer, you can help to minimize the fact that your earnest money is substantially less than what they might expect when their home is listed by an agent.
Negotiations & Motivation
In closing, its important to remember that during this process, keep the Seller pointed on the end goal of getting the home sold! Don’t get so lost in the negotiations over small points that you lose out on an otherwise good deal!
I’ve put down substantial earnest money on great deals in the past… you bet! I then turned around and sold the equitable interest to another and secured that contract with a non refundable earnest money of even more!
So remember, if you are a wholesaler, negotiating on earnest money deposit, you still have your opportunity to charge a significant earnest money deposit of your own! If you are smart, you will make it non-refundable!
Thanks again for the question, and as always…
Have a POWERFUL Sales Day!