Earnest Money for Real Estate Investors

Bonus Module

Earnest money is a financial commitment you make to show the seller you’re serious about buying the property.

It’s an amount of money you deposit when you go under contract, and it’s typically held by a neutral third party, like a title company, real estate broker, or attorney.

The main purpose of earnest money is to demonstrate that you’re acting in good faith and intend to follow through with the deal.

For sellers, earnest money acts as a safety net. If the deal falls through because you don’t meet your obligations, the seller can keep the earnest money as compensation for the time the property was off the market. This protects the seller from buyers who may not be as serious about closing the transaction.

For you, the earnest money is also a motivator. Since you’ve put some money on the line, you’re more likely to move forward and meet the terms of the contract to avoid losing it. That risk encourages you to stay on top of your deadlines and complete the purchase.

You’ll usually need to deposit earnest money shortly after your offer is accepted. Most contracts set a deadline, often within three business days of mutual acceptance.

The earnest money isn’t an additional cost; it’s applied toward your down payment or closing costs when you close on the property. So, it’s essentially part of the funds you already need for the purchase. If all goes well, the money helps move you closer to owning the property.

Table of Contents

Here’s what’s included in this module:

• Introduction to Earnest Money for Real Estate Investors

• Earnest Money versus Specific Performance

• Is Earnest Money Required?

• Who Holds Earnest Money?

• Can You Get Your Earnest Money Back?

• How Much Earnest Money Should You Put Down?

• Strengthening Your Offer with Earnest Money

• Earnest Money and Off-Market Deals

• What Happens in an Earnest Money Dispute?

Earnest Money versus Specific Performance

When you’re buying your first investment property, it’s important to understand the difference between an earnest money contract (also known as a liquidated damages contract) and a specific performance contract.

The key distinction lies in the remedies available if one party doesn’t follow through with their obligations.

• Earnest Money Contract - In this type of contract, if you, as the buyer, fail to meet your obligations, the seller is typically entitled to keep the earnest money you deposited as compensation. This is called "liquidated damages." It essentially limits the seller’s remedy to the amount of the earnest money if the deal doesn’t close.

• Specific Performance Contract - A specific performance contract allows the non-defaulting party to force the other party to follow through on the agreement. If you’re the buyer and the seller defaults, you can legally compel the seller to sell the property. In a contract where you, as the buyer, are also agreeing to specific performance instead of liquidated damages, the seller could force you to complete the purchase instead of just keeping your earnest money.

For most buyers, especially when purchasing their first investment property, the contract you sign will likely be an earnest money contract for your obligations. This means that if you default, the most you’ll lose is your earnest money. However, the contract is often written as specific performance for the seller. This is important because it means the seller is obligated to sell the property to you, and you can take legal action to ensure they do so if necessary.

There are situations where a contract may give you the option to choose between an earnest money contract or a specific performance contract. If this is the case, make sure you check the appropriate box and fully understand what you’re agreeing to. Ask your real estate agent or consult your attorney before signing to ensure you’re clear on the terms of the contract and how they impact your rights and obligations.

Is Earnest Money Required?

When you’re buying your first investment property, earnest money is typically expected as part of the real estate transaction.

It’s a deposit you make to show the seller you’re serious about purchasing the property.

While it’s not technically required by law, most sellers will expect it, and without it, your offer may seem weak or uncommitted.

Earnest money can also serve as consideration for the contract, which is a legal requirement in most agreements. Consideration is something of value exchanged between the parties to make the contract binding, and earnest money often fulfills that role in real estate contracts.

From the seller’s perspective, earnest money can significantly impact how they perceive your offer. A higher earnest money deposit can make you appear like a stronger, more reliable buyer. Sellers may see this as a sign that you’re serious about closing the deal, which can be especially important if there are competing offers.

It’s also important to understand that earnest money is not an additional cost.

Earnest money counts toward your down payment or closing costs, meaning it’s part of the funds you’re already planning to bring to the table to close the deal. Once you reach the closing stage, the earnest money you’ve deposited will be credited toward those costs, reducing the amount you owe at closing.

Who Holds Earnest Money?