Earnest money is a set amount of money that you’ll put towards a property when entering a sale agreement. It is oftentimes referred to as “good faith money,” and it helps to suggest to the buyer that you are very interested in purchasing their property. This money goes towards the purchase of the property if you end up closing on the deal, but it can be forfeited to the seller if the sale falls through because of specific actions taken by the buyer. A larger earnest money deposit suggests a greater interest in closing a deal, because the buyer could end up forfeiting that money if they don’t do what they need to do to close the sale.
Nobody wants to forfeit a large sum of money because they failed to close a sale, but you also want to use earnest money to show that you are very interested in making a deal work, so how can you showcase this interest and protect this money during the course of the sale? We explain how we can help you protect your earnest money during a commercial acquisition in today’s blog.
Protecting Your Earnest Money
Earnest money is only forfeited to the seller when the buyer does something specific that causes a sale to fall through. If the seller backs out or the buyer has a legitimate reason to walk away from a sale, that earnest money will be returned to the buyer. So how can you be sure that, as a potential buyer, you don’t put your earnest money at risk? Here’s what we recommend.
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Specific Language - When writing a contract proposal, clearly define the legitimate reasons as to why you may need to walk away from a deal that would not require you to forfeit your earnest money. Some common reasons include inability to secure financing or the property failing some inspections during the closing process. You can also lay out other specifics in your contract that allow you to retain your earnest money if a sale falls through, but be wary of including too many reasons, as this could suggest that you may be more likely to back out of a deal. Working with a title company who can draft earnest money provisions for your purchase contract can help to protect your financial interests.
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Know Why You Can’t Walk Away - Also make sure to familiarize yourself with what actions could cause you to forfeit your earnest money. For example, entering closing and then discovering a property that you’d rather purchase instead is not a valid reason to let a sale fall through and keep your earnest money. Understand what types of actions could cause you to forfeit your earnest money and work to determine if these are risks that you’re willing to take.
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Find A Trustworthy Holder - Earnest money is typically held by a title company or real estate brokerage during the closing process. It’s essential that you trust your earnest money to an experienced team that can hold and move this money as needed during the course of the sale. At Commercial Partners, we commonly hold large-scale earnest money deposits for our clients, as we can even invest these deposits safely so that your earnest money can actually grow during the closing period. We will also move the money to the seller or refund it as necessary depending on how the sale plays out.
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Only Risk What You’re Willing To Lose - Nobody expects to need to walk away from a sale, especially one that they are very interested in making, but at the same time, unexpected life events can drastically change our priorities in a hurry. You may have more than enough money to complete the sale on your own, but that doesn’t mean you need to put 50% of the total sale amount down as an earnest money deposit. Earnest money deposits are typically between 1-3% of the total purchase price, and while it can help to showcase your interest, other aspects of your purchase contract will matter much more to the seller, so there’s no reason to go over the top with your earnest money deposit. You have a lot to lose and very little to gain by going over the top with an earnest money deposit, so play it safe and ensure other aspects of your purchase agreement (like offer amount and contingencies) are fair.
If you do all of the above and trust your earnest money deposit to the team at Commercial Partners, we are confident that your financial interests will be protected. For more information about earnest money or other important aspects of a commercial acquisition, reach out to the team at Commercial Partners today at (612) 337-2470.