Earnest Money Deposit on REO Properties

Earnest_Money_DepositWhen you submit an offer on any piece of Real Estate you will have to provide an Earnest Money Deposit on the property.  This demonstrates that you are willing to take action on purchasing the property and you actually have the funds.Your deposit is a commitment to purchase the property and after your agreed inspection periods are over you have to purchase the property or the seller will keep your funds as damages they’ve incurred for stopping marketing the property and holding costs.

Now the investor’s goal is to put as small of a deposit as possible and the seller would like the largest deposit as possible.

The Standard

From what I’ve seen the standard was $2,000 – $3,000 on properties under $100,000 and $5,000 on properties for sale over $100,000.  A 10% earnest money deposit will show a bank that you are serious about the process, but usually will not overcome a higher offer.  Realize this is a negotiation ploy and it really can show how serious you are without costing any extra money.  I know of a couple different investor who brought in an earnest money deposit at their full price, if that doesn’t show the bank you are a serious buyer, I don’t know what will.

The Process

Depending on your agent, you typically will not need to provide the actual check when you write the offer.  We just write out a check and scan a copy.  In California, the seller typically picks the escrow company.  So you would just write a check out with a bunch of spaces ”                              Escrow”.  When your contract is accepted the idea is, you can write in the escrow companies name in the blank space, “West Coast       Escrow.”

The Accepted Offer

More often then not, the seller wants a cashier’s check versus a personal check.  So the original check will be thrown away and you will have to go to the bank and make a cashier’s check.  If you are bringing it directly to escrow always make a copy first and email or fax it to your agent so they can pass it on to the seller.  Sometimes they will take a personal check.

Why is my Agent telling me to write a check in his Company Name?

Some real estate agents sent up what is called a “trust account” for their clients.  They handle money for clients and will pass it directly to escrow.  In my experience this is becoming less and less common as there is a lot of liability that comes with handling this money.  It is totally legitimate to do this as a buyer and it is heavily regulated.  Most agents prefer not to deal with it, as it is one of the most common reason for them to lose their real estate license.

Some things not to do

  • Do not ever write an earnest money deposit in for less than $1,000 dollars (especially to a bank)
    This shows that you are in-experienced and do not have a lot of cash.  You should offer a low price if you would not be willing to put a $1,000 deposit up on the property to get it.
  • If you get an accepted contract, have the money!
    Real Estate agents can tell very quickly when someone is trying to buy time.  If you do not bring a cashier’s check to escrow promptly (usually within 2 business days of an accepted contract), you will be thrown out of escrow and ruin your reputation.
  • Get a Professional Check Book
    There are a lot of fun check book designs out there.  Disney characters, the galaxy, etc.  But if you want to come off as a professional investor try to go with a professional check design.

Wholesaling Properties

If you wholesale properties.  ALWAYS make sure that your buyer’s earnest money deposit is bigger than the one that you put with your purchase escrow.  If the buyer does not perform you want to be able to keep their deposit at damages and not lose out.

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6 Responses to “ Earnest Money Deposit on REO Properties ”

  1. Jason Harris says:

    I m getting started on wholesaling. I have absolutly no money!!! but two good properties and 5 good buyers! this might be my first wholesale deal. But Im nervous about how to get this deposit problem worked out(no money) can you help me? also is it ok to write a invalid check(just to submit an offer!!) even though my buyer will be supplying the real check at escrow?

  2. Israel says:

    if seller is asking for a cashir check after an offer has been accepted, do I still have to make a copy and log it in my broker’s office logger.

  3. Steve says:

    Israel – if the check isn’t made to your company I do not think you should have to log it. But I am not sure, probably be best to ask your broker.

  4. carol says:

    the seller (bank) asked for a good faith deposit be a cashiers check made out to a attorneys office . is that legal or normal? i am set to sign addendum papers today and make the ck. i feel uneasy about this process, I have bought homes before and never made a check out to the sellers attorney.

  5. Stephen says:

    Hello Steve. I discovered your website tonight through biggerpockets.com Excellent amount of info and I have added it to my collection of great blogs. I am just getting started to take action in building my wholesaling business. You know the deal, begin wholesalingm build confidence and capital, then start flipping my own properties. I’ve gone back to the beginning of your site and will read everything up to the present. You are definitely having the success and it looks like the fun that I want to have. Quick question, I know the advantages and disadvantages of having your own RE license, Do you have a license personally or do you have a realtor on your team? I’m hearing that you can not even hang bandit signs without acknowledging that you are a realtor if you have a license. Is that true? Thanks for your time. Great info on earnest money deposits for REO’s, btw. That article is like a module in itself in some of these RE courses out there.

  6. Steve says:

    Bandit signs in general are a debated subject. They are illegal to hang in most counties, or at the very least frowned upon.

    People still do it all the time and just hope they don’t get caught.

    Real Estate Agents must have their license # in all communication. So I guess technically if you are licensed you are supposed too.

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