Well for those of my friends out there who were English literature majors, please be assured I am not referring to the great play by the famous Irish playwright, Oscar Wilde. No, quite to the contrary, I want to keep this about Real Estate. In every transaction, there comes a time when you have to put up or shut up and for the sake of this context we are referring to that thing called the “Earnest Money” deposit. In these extremely competitive times, it can make or break a deal. Let me expand on this.
In every transaction, there are elements that make an offer more acceptable than others and many times it goes beyond simply paying a higher price. Listing agents are constantly telling buyer’s agents to “come in with your highest and best offer.” There are 5 major elements that contribute to this notion, but we are only going to consider one of them. I will review some of the others in future blog posts but for the time being, one of the elements of the “5P’s” is just how the hell are you are going to PAY for it. The terms of the transaction could be CASH, Conventional or FHA Financing, owner hold, etc. Within the scope of all of these is the point where the buyer has to put up some amount of money to show Good Faith. We call this Earnest Money, and it can be all or part of the total deposit. Let me give you an actual case where it was the essential component of an acceptable offer.
I listed an extremely modest home in Angola, NY not too long ago. It was priced at a mere $119,000. Because of the uniquely favorable waterview location, I knew that regardless of the condition it would sell quickly. Not surprisingly, there were 10 offers, after the one and only Open House. Two of them were under the asking price and 8 of them were over. There were two that were tied at $135,000. Both of them were cash. One of them had an earnest money deposit of $2500. and the other was $35,000. The seller was a delightful but albeit relatively feeble Senior Citizen. We reviewed all of the offers together and she keenly considered the one with the hefty Earnest Money deposit. She looked at me and in a very clear business like manner, she pointed something out to me. I chuckled when she exclaimed, “Well, at least there’s one joker here who is serious.”
Many times I will see Earnest Money Deposits of $1000. or $2500. and I ask myself how did anyone come up with these amounts? Let’s use some other numbers to make this point a little clearer. If a house sells for $100,000. and the buyer is financing 80% that means there is a total deposit of $20,000. What should the earnest money deposit be? What portion of the $20,000. makes the most sense? When I first got into the business I was told 10% was expected. that would be $10,000. So ask yourself. Which is MORE earnest: $10,000. or $1,000? In the scenario I just used, if you are stating on the contract that you are putting down $20,000 as your total deposit, you do realize you are affirming that you are in actual possession of that amount. If you are only willing to put up a tiny portion of that, as a seller, I am not feeling you are being all that Earnest. You are not all that committed to moving forward. Where it really becomes beyond absurd is when you see houses that are selling for $500,000 or more, and buyer’s expect a seller to effectively take their house off the market for 6-to 8 weeks with a paltry earnest money deposit of just $5,000. That’s just plain goofy.
Many times nervous buyers will ask me, “What’s the least I can put up?” I tell them, believe it or not, there is no legal minimum. You can put up nothing. You can even put up “love and affection.” The problem is with either of these, if you try this approach, most sellers will just laugh at you. They will feel a lot more secure, and you would too, if you put some serious dough on the table. Cuba Gooding said it the best in the film Jerry Maguire, when he repeatedly told everyone to “Show me the money!” It’s important to be Earnest. And these days, more times than not, just how Earnest you can show a seller you are willing to be, will go a long way in getting you the house you want. It is one of the points that brings you to that sweet spot of “highest and best.” So put up or shut up, Earnest.
About the Author:
Brendan J. Cunningham (SFR®), (SRES®)
Associate Broker. The “Platinum Team”His first book, (He is currently working on his 5th) TRICKS OF THE TRADE: A REAL ESTATE BROKER’S INSIDE ADVICE INTO BUYING AND SELLING A HOME (Adams, Media Corporation, Avon Ma. 2004) is a must read for any savvy real estate investor.
Brendan is a member of:
National Association of Realtors
New York State Association of Realtors
And he is also a member of the Buffalo Niagara Association of Realtors….
….where he has been quite active as Director, Treasurer and Vice President. He has served on over 30 committees over the years. He is a member of their faculty and the author of “Selling Real Estate in Volatile Times.” He holds The Seniors Real Estate Specialist® (SRES®) and Short Sale and Foreclosure Specialist Designations (SFR®), and as the point person for the 716 Realty Group’s Platinum Team.
Brendan J. Cunningham
e. BCunningham@716RealtyGroup.com | p. 716-818-2526