Why Earnest Money Can Cost You Big Time!

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Transcript

Introduction to Earnest Money Concerns

Speaker 1 0:06

Welcome back to Wholesaling Red Flags, the series where I discuss things that should alarm you before it costs you a deal, make it into the closing table. Today, we're going to be talking about earnest money deposits, both on your purchase and when you're assigning your contract. So let's start off with when we are talking to the seller and they want us to make an earnest money deposit, maybe a significant amount. The reason why this is a red flag is because normally, if a seller is asking for a significant amount of earnest money, there is a reason behind it, right, and what I mean by that is there's not very often a seller who's never been burned by another wholesaler or an investor, or an investor themselves or a realtor, where they just ask you to put down $5,000 non-refundable EMD or 10% of the purchase price, right, some of these alarming earnest money deposits that we hear as wholesalers, and so anytime a seller brings this up to me, I want to breach the subject by saying what's the reason behind you wanting or needing that much earnest money deposit? The reason why I want to know that is is because now we can deeper dive into the true motivation behind that, Just like when we try to close a deal with a seller, it's all about the true motivation. Rarely does it come down to the seller just flat out wants earnest money. It's because of a fear, a fear that maybe something else has gone on. Maybe they previously went under contract with an investor and that person has strung them along all the way up until a closing date and then terminated. Well, maybe that's a sign that the purchase price is incorrect. Maybe the condition is worse than we anticipated. Maybe there is something else going on as to why that investor that previously had it under contract terminated and we should ask questions about that. See, this is an open opportunity for us to really dive deeper into the numbers and the motivation and the thought process that the sellers have.

Speaker 1 2:17

So, for example, if I were to ask the seller, why do you want me to put down 10% of the purchase price as earnest money? They can say, well, it's because I've been burned. Okay, well, that makes sense. What purchase price was the previous wholesaler or investor under contract for? What was the reason why they terminated and how does the earnest money protect you any more than it does with me putting a lower earnest money and just lowering my inspection period?

Protecting Your Deals with Buyers

Speaker 1 2:47

See, at the end of the day, rarely does a seller really want to walk away with their earnest money deposit. It's just that they want to make sure that their deal is actually going to make it to the closing table, and that's what you really want to get down to and discuss with the seller. This is the end objective. I don't get paid unless this deal closes and funded. You don't get paid unless this deal gets closed and funded. So, collectively, together, we should work as a unit to make sure that this deal is at the right price where we can both get paid and, realistically, that fairytale number of earnest money being deposited and held in escrow is not what's going to move the needle on whether or not this deal makes it to the closing table or not. See, it might mean that you're more motivated as a wholesaler to make sure that the deal gets sold so you don't lose your $5,000 or your 10% earnest money deposit. But in reality, ultimately, you can't do anything different than what you were going to. You're still going to market that contract for an assignment, you're still going to do dispositions, the exact same to your end buyers, and if it works, it works. If it doesn't, it doesn't. That's the conversation that you need to have with the sellers, and very rarely do I ever waiver from putting a large amount of earnest money down.

Speaker 1 4:12

Now let's talk about with our end buyers. A lot of times our end buyers want to negotiate how much earnest money that they're going to put down as a wholesaler. What we are doing is we are asking our end buyers to do their due diligence up front and then deposit nonrefundable earnest money. The reason why we're doing this is because our equitable interest is being assigned to them, so our controlling interest in this contract is now going to be in their hands. The only way that we can protect ourselves is through non-refundable earnest money. Case in point if we were to assign our equitable interest to the end buyer and they only put down $100 earnest money and then not perform, that's all we get, but we have lost our rights to do anything else with that contract unless they terminate and they walk away from the deal, and then we would have to go back and renegotiate for more time from the seller, and normally that's a deal killer. So it's our way of protecting ourselves.

Defending Against Daisy Chains

Speaker 1 5:16

Now, another thing that you need to be very aware of is the timeline in which your end buyer takes to deposit the non-refundable earnest money, and the reason why this could be alarming is it could be a sign that the quote unquote end buyer is actually a daisy chainer. Quote in buyer is actually a daisy chainer. There are many people that are taught what they could do is go get a deal from another wholesaler, sign an assignment and then market it for the next two to three days without any recourse. Try to find another buyer to pay more and if they do, they can just have that in buyer, deposit that earnest money. This is why you don't want to give any longer than 24 hours to deposit that non-refundable earnest money.

Key Takeaways and Final Thoughts

Speaker 1 6:01

Now you always want to verify and ask the end buyer like what's your intentions? Are you going to flip this? Are you going to keep it as a hold? How are you going to finance this deal? Is it cash, private money, get proof of funds. But at the end of the day, if someone's business is built around a lie, they have no problem lying straight to your face and saying I plan on flipping this. I'm going to use a hard money lender, I'm going to use Wildcat Lending and get a proof of funds from Wildcat Lending and you did your job, you vetted them. But having that non-refundable earnest money deposited in 24 hours or less is what protects you from your deal being daisy-chained and, as a wholesaler, you should continue marketing that deal until you have a signed assignment and non-refundable earnest money deposited. This is a protection of you and your interest in this contract and ultimately also protecting the seller and making sure that their deal makes it to the closing table. So, as a wholesaler, you should really have non-negotiables when it comes to the earnest money deposits, the time frame, the amount and making sure that this end buyer is truly who they say they are when you vet them out. This is how you protect yourself.

Speaker 1 7:20

So when it comes to earnest money, it is kind of a touchy subject sometimes, right? How much are we actually depositing with sellers? What's the reason behind it? Really identifying the motivation that the seller has for you to put a significant amount down and protect yourself in those scenarios. What I've found anytime a seller actually wants a significant amount of earnest money, it's probably because they know that the price that they're selling you, the property and the condition that it's in, is probably not correct. That's why they're wanting to lock you in with some non-refundable earnest money. It's probably because they've been burned and told this in the past. And then, when it comes to your buyers, make sure that they are doing it in a timely manner, that they're not negotiating you down to where your equitable interest becomes worthless at the end of the day. All right, guys, that's our episode of Wholesale and Red Flags Earnest Money Edition. Let me know what you think in the comments. Make sure you show me some love and like today's video. We'll see you, guys, tomorrow.