There’s no Earnest Money required to make a real estate contract legal or enforceable. The exception to this rule is if you’re entering into an OPTION to Purchase Real Estate. In that case, a $100 Option Deposit is required to make the option enforceable.
Most real estate contracts, however, have monetary consideration in the agreement. This is known to be a token of good faith by the buyer to put up a deposit while the house in under contract.
What Does Earnest Money Mean?
Earnest Money is a deposit made to a seller by the buyer that represents good faith. Giving an earnest money deposit shows that you’re serious about buying the property and that you intend to close the transaction. In a traditional real estate transaction, you can expect to pay 1% – 5% of the purchase price as an earnest money deposit. A real estate wholesale transaction isn’t your usual type of deal, therefore the earnest money requirements by the seller normally go right out the window.
How Much Earnest Money is Required on a Real Estate Contract?
If you’re dealing with the right motivated sellers, they won’t ask for an earnest money deposit. By the “right” sellers, I’m talking about MOTIVATED sellers, the ones that NEED to sell their house. Sophisticated sellers tend to ask for earnest money deposits.
EMD Not Required in all 50 States
Earnest money deposit is NOT required on a Real Estate Purchase and Sale Agreement in any of the United States of America. The promise to buy is the consideration that’s required to make the contract enforceable. To avoid the topic, you can completely removed the Earnest Money line item from your contract. The seller doesn’t see it, and therefore they don’t ask for it. Brilliant!!
In the event you get one of these sellers that insists on an Earnest Money Deposit, you want to remain RISK FREE. There are a few things that you can do.
What to do if the Seller Asks you for an Earnest Money Deposit?
- Write into your offer that the EMD is due within 7 days after acceptance. Potentially, this could buy you some time. See if you can get a buyer for your contract (assignee) within that time frame who can put up the money. If you don’t get any takers within 7 days, you can cancel the whole deal.
- Tell the Seller that Since you Close so fast, you typically don’t put up Earnest Money Deposits.
- You can explain that any purchase price under ($xxx make this part up) you don’t typically put a deposit up.
- Tell the seller that you need to keep your cash liquid. This is so that you can close on the contracts that are scheduled to close in front of his. Offer the seller $10. Conclusively, just because the seller asks for an Earnest Money deposit doesn’t mean that they want your arm and leg.
- Offer them $10. Some people think that they MUST get at least $1 to make the contract legal. Crazy, right?
- Forget the whole thing. Sometimes you just have to tell the seller to kick stones (in a nice way, of course). I mean, if you write a big check, you may lose a big check.