REO’s and Earnest Money Deposits

I get quite a few emails with visitors asking me about earnest money deposits and real estate owned properties.  Here is a good Frequently Asked Questions for bank owned houses and earnest money deposits.

How do I provide the Earnest Money Deposit with the initial offer?

Here is the way we do it.  With every offer we have a scanned copy of check written out to “___________ Escrow.”  The idea is, if the contract gets accepted you can just take the check and write the name of the escrow company agreed upon.  So after the fact you’d squeeze in “ABC” before the word Escrow.

What amount of earnest money deposit should I provide?

There is no correct answer for this.  It depends on the price range of properties.  As an absolute minimum it should be $1,000 (for bank owned properties).  Another rule of thumb is for cash transactions a minimum of 10% of the purchase price is requested.  We usually do $5,000 or $10,000.  If the market you work is not very competitive you can probably get away with less but remember this portrays how serious you are as a buyer.

Who holds the earnest money deposit?

I do not provide the physical copy of the check, just this scanned copy with every offer.  Every so often agents will request a physical copy of the check to hold in their office, or sometimes they even want a cashiers check.

Who should the earnest money deposit check be made payable to?

See my above example, we typically make them payable to”___________ Escrow.”

Will a $1 earnest money deposit work?

A lot of gurus suggest using a $1, $10, or $100 earnest money deposit on all transactions.  This is especially true for people who write hundreds of offers a day.  DO NOT DO THIS WITH BANKS!  This will immediately show you are not serious about buying the property and you are not confident in the research you have done.

Is the the earnest money deposit refundable?

In most cases, YES.  Unless you specifically remove all contingencies in your offer you have X period of days to do your due diligence on the property.  I am sure every state is different, but I believe in California you have 7 days (review the CAR form).  Be careful though, most banks issue addendum that heavily modify the Association of Realtor default contracts and sometimes they completely remove your due diligence.

When will I have to provide the earnest money deposit?

Most banks issue an addendum to the contract you sent to them outlining additional terms and conditions.  Once you sign and agree to this contract you usually have to provide the earnest money deposit.  Most escrow companies will request a cashiers check in cash transactions.  So you will have to go the bank and get one (cashiers check usually guarantee funds are available).

What should I do if I do not have any money for a earnest money deposit?

This is a tough question, you can either focus on dealing with other segments of the market (private party sellers, probate sellers, etc) who are more flexible on the deposit.  You could also partner with someone who will provide the deposit for you or save up.

I would recommend you do not try to “fake” that you have the funds, if you cannot deliver on your promise it will ruin your reputation and believe me banks keep track of agents/buyers who do not perform.

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