Keeping Track of the Earnest Money Deposit and Why You Should Care

“Is the Earnest Money Deposit (EMD) in or not” is a simple question.  Yet it is of huge importance to doing real estate deals efficiently and without encountering major problems in your deals.  While many Purchase and Sale Agreements (Contracts) stipulate that the Earnest Money Deposit be in the hands of the escrow agent for the contract to be valid, that doesn’t mean it happens all the time.

If you are dealing with real estate agents you’ll find out quickly that the most experienced ones will be crazy about getting your EMD into the hands of their escrow agent. Even if their escrow agent is different from the closing agent, they want the EMD in as quickly as possible to know you are “sincere” about your purchase.  If the agent insists on a large EMD of 5% to 10% of the purchase price, try offering $1,000 to start.  Then if you must, offer the rest of the larger amount AFTER the inspection period is over.

My mentor Students generally do one of three things.  First they put up the deposit as required but only if they truly believe they can get a discount before the inspection period is over.  Second, they use a single EMD with their chosen escrow agent who gives them a EMD deposit letter to use with multiple deals.  The last option is they dodge the issue as long as possible while they try to find a buyer for their wholesale deals.   Dodging the issue is more common than most investors think.  It is a “normal” wholesale tactic used by the same investors who may be buying your deals.

The process for these guys who “skirt” the issue is to send the seller a signed contract.  Sometimes they even send a copy of the cashier’s check made out to the escrow agent as required by the seller.  The signed contract is sent to the closing agent but the cashier’s check is returned to the bank it came from and deposited back into the buyer’s account.

The trusting seller now moves toward the closing anticipating the deal will close.  If the buyer doesn’t cancel during the inspection period, the seller believes even more wholeheartedly that the closing will happen.

Sometime just before closing the buyer informs the seller that he needs a discount to close.  If the seller is unwilling, the buyer cancels and the seller thinks he is getting the Earnest Money Deposit.  But there never was an EMD so the seller must now sue the prospective buyer for “Breach of Contract” to get the money.  Seldom does the amount of the EMD warrant suing the buyer.  The only winner will likely be the buyer’s and seller’s attorneys.

To control your deal you need to control the sales agreement by using the proper contract clauses and having the EMD actually in the hands of your escrow agent and preferably not the buyer’s escrow agent.  To make sure you actually get the EMD if the buyer defaults, you’ll need a clause that states the EMD is forfeited irrevocably if the buyer doesn’t close timely.  In addition, the clause should say that the closing agent is indemnified if he releases the EMD to either the seller or the buyer.

In summary, always try to control the Earnest Money Deposit from your buyers and get as much as possible.  If you are doing a double closing (A – B and then a B – C) you should ALWAYS get more EMD from your buyer than you give your seller.  If your buyer defaults and you can’t find another buyer in time to close, you can still make money by getting his larger EMD and losing your smaller EMD.

To your limitless success,

Dave Dinkel
Real Estate Mentor Program Founder