How can I make an offer and put a property under contract for the purpose of wholesaling withoutt putting down earnest money out of my own pocket?

Asked by Wmw Enterprises, 83815 Sat Apr 9, 2011

No seller or agent I've encountered will accept my offer without earnest money down! And no buyer/investor will consider my deal unless it's under contract! Myself and those I wish to assign to have missed some "Smokin' Hot Deals" over this "Catch 22", yet noone can answer this simple question? I wish to be making 5 to 6 offers a week in a low competition market, but as I'm new to this end of the game, and have just re-entered investing after a long hiatus, I do not have the capital! I know this can be done and there's a way around this problem! I just don't know what it is!!! Help? Anyone? Thanks, WMW

Help the community by answering this question:

+ web reference
Web reference:

Answers

10
Andrew Queza…, , Covina, CA
Sat Apr 9, 2011
BEST ANSWER
Hello, I'm not an attorney but I know you should be able to get a letter from an attoney indicating that you have elected to use his firm to hold your EMD as opposed to an escrow account. Explain to him what you are doing as he will play a key role in the acquisition process. This way, you are not obligated to tie up your funds for every property. If you're buying cash, I would pursue properties via other avenues rather than off of the MLS. Also, not all properties require a minimum EMD. Take a look at this clip from Real Estate Radio USA:

http://www.realestateradiousa.com/2010/05/20/earnest-money-d…

I hope this helps.

- Andrew
Web Reference:  http://www.AQHomeLoan.com
2 votes
Robert Range, Agent, Reno, NV
Sat Apr 9, 2011
Earnest money is technically completely negotiable - it could be $1 or even personal property. Problem is that you are probably looking at REO or Short Sales. I find that a bank will require at least 1% of purchase price for an REO property - and their rider or addendum will probably prohibit assignment. Your offer to them could contain any terms you like, but chances are they are going to counter with the terms their attorneys have drawn up. With a short sale you might be able to get away with not depositing any Earnest Money until the lenders have approved, but once they have a approved it will be in a specific buyers name and not assignable.

Robert Range
Prudential Sierra Nevada
Web Reference:  http://www.RobertRange.com
2 votes
Jim Paulson, Agent, Boise, ID
Sat Apr 9, 2011
As I professional Realtor, I get these calls and emails on a regular basis and even more frequently after a "no money down" infomercial or seminar hits.

The problem is you can't legally do this because one of the essential parts of a contract is "consideration" (earnest money). There is no hard and fast rule that dictates the amount of earnest money required, but at least in Boise, we customarily ask for 1% of the sales price. I have seen several banks require more and up to 10% for cash transactions. You can provide non cash items as "consideration" if the seller is willing to accept it.

If you are looking for "Smokin' Hot Deals", you are probably chasing short sales and bank REO's. Be prepared to have to be "Pre-approved" from those banks before even submitting your offer. I am told that practice may be against the law, but good luck getting past the $10 an hour (maybe $10 a day in some other country) clerk at the bank's processing plant with that line of thought!

Many bank owned properties also dictate that you can't flip the property within certain time frames. Other banks dictate a 15 day waiting period for owner occupants. Other banks state the offers can not be assigned to another party.

I know of one person that used the some cashier's check as proof of funds for his earnest money deposit for seven transactions. He served time in a federal prison for loan fraud! That is why deposits are typically held in the real estate company trust accounts or at a title company - assigned specifically to a given transaction!

Also, if you were really able to tie up a property without any money, you would have no legal ownership interest in the property and therefore, if you sold it or helped sell it, you would need a real estate license since in Idaho you typically can't sell property without one unless you are related or an attorney!

If it was as easy as the late night infomercials make it sound, there are over 1.2 million Realtors in the US that would have already beat you to that elusive "Smokin' Hot Deal". Occasionally, those deals do in fact exist, but usually at the frequency that justify selling books and tapes and systems rather than chasing them personally!

If you are really planning on getting into this "game"; make sure you read all the fine print and the rules on contract law, assignment of contracts, real estate law, and about mortgage fraud. If you don't, you may find yourself on yet another "long hiatus"!
2 votes
nthony, your point is moving in the right direction, I have been a flipping for over twenty years, and I can tell you this - don't let some slick talking broker/agent try to out talk the 1988 Inside Information Act, it's still on the book - just not enforced

It strictly forbids any key personnel from certain violating relationship boundaries, especially if it involves fiduciary trusts. This is exactly why stock brokers cannot particulate in IPO's, well the same thing for RE agents and brokers - it is not lawful for an RE agent to even be involved on a REO purchase, you are supposed to have direct access to the bank (like it used to be) both banks and brokers are complicit in this they WANT desperately to conventionalize REO purchases for two reasons:

1. Banks wants to make market price - that's a lot of bank fees right there!, problem is they don't own the home in the traditional sense.

2. The Agent / Broker willingly obstructs for them for the commissions.
Flag Sat Jul 9, 2016
You are right and wrong at the same time. Consideration is an essential part of a contract but it does not have to be money. I've been informed by many attorney's the "Intent" of the contract could be considered consideration. My time and due diligence can be consideration. We do this all the time with REO properties as well as shortsales. REO's give you 7 or so days to have a free look IE: inspections etc. As for short sales I will write X amount in EM to be deposited 7 days from bank approval. As a broker owner and real estate investor trainer I'm here to tell you it's NOT as "easy" as some guru's make it sound. Like anything it takes work and proper education but there is a ton of truth to the fact that professionals in every town across the country are buying properties 50-60 cents on the dollar and the majority of realtors will never know how to take advantage of it. I'd encourage you to join your local REIA and expand your knowledge base. All the best.
Flag Sun Sep 29, 2013
Steven Signo…, Agent, Hanover, PA
Wed Apr 20, 2011
First of all , again, start a relationship with a realtor. Why is there such reluctance to go to a realtor first thing, they will make looking very easy, information free of charge, and all you have to be is loyal to them when you finally want to put an offer in.
You can put an offer in with just $100 bucks , but if they accept the offer they want to see at least a $1000 total down. You can get that back if you do a USDA mortgage ,borrowing 103.5 % and asking seller for 6% seller assistants. If you are unable to put down this minimum , you have no business even buying real estate. The only thing you learn from those courses in investing is that the author got paid . Before you start investing, you should save a fund to invest with, and carry you through your investment and personal living cost for 3 months.
What ever you do never do it on a line of credit, borrowed money.
1 vote
Dp2, , Virginia
Sat Apr 9, 2011
Please don't take my comments to be any form of legal advice--it's not.

"Also, if you were really able to tie up a property without any money, you would have no legal ownership interest in the property and therefore, if you sold it or helped sell it, you would need a real estate license since in Idaho you typically can't sell property without one unless you are related or an attorney!"

First, this statement is only partially correct. A contract is only legally binding after an exchange of consideration. That consideration could be money, something tangible (like a car, boat, etc), stocks/bonds/options, equity in another property, or a promissory note.

Second, assuming that there's an exchange of consideration, then an executed purchase agreement or an option gives a buyer/optionee equitable--not ownership--interest in a property. That equitable interest establishes that buyer as a primary--not facilitator--in the deal, and it enables him/her/them to assign that interest to another entity (unless expressly prohibited via the purchase agreement or addenda). Thus, the "you can't sell . . ." clause is incorrect.

Third, James, there's no other way for WMW to structure the deal and protect his/her interests.

Fourth, Robert gave some good advice, and I'll add some of my own. WMW, if you own your home, and have some equity in your property, then you could use a portion of the equity as your EMD. If you have a car, then you could use that as your EMD. Again, you could use a promissory note. You could partner with another investor who has the cash, and the list goes on.
1 vote
Jim Paulson, Agent, Boise, ID
Thu May 31, 2012
I was just notified of a new post to your question and was wondering if you have been able to take advantage of any of the "smokin' deals" you were hoping to.

I have seen more banks include "no assignment's clause's" lately. They even dictate the amount of earnest money and increase it if the offer is a "cash offer".

I get contacted a few times a month from investors that want to buy homes for 40-60 cents on the dollar so they could flip them. If it was really that easy, wouldn't the nearly 5,000 Realtors in the state of Idaho already be acquiring them themselves since they could make 50% not just a commission?
0 votes
David Briley, Both Buyer And Seller, Beverly, MA
Thu May 31, 2012
Use some one else's $500 and pay them interest if a deal goes through. Also could cash w/draw from Credit card if you have an end buyer lined up. Use HELOC too!
0 votes
Terri Vellios, Agent, Campbell, CA
Sat Apr 9, 2011
Jim said it very well. If I were you, I'd give him the Best Answer.

If you want to get in the game, get a good agent so you won't miss a beat or a deal, and hopefully, keep you out of trouble.
Web Reference:  http://terrivellios.com
0 votes
James Gordon…, Agent, Hamilton, OH
Sat Apr 9, 2011
Wmw why don't you turn those "smokin hot deals" over to the people that you wish to assign the contract to. The deal would be even more "smokin hot" for them without an assidnment fee and I am sure that you could work out a compensation package that would not violate your state laws on real esate commissions.
0 votes
Pam Jank, Agent, Coeur d Alene, ID
Sat Apr 9, 2011
Earnest Money Consideration can be as little as a $1 bill, promissory note or even the title to your Motor Cycle.
Your earnest money does not have to be held by the Real Estate Brokerage or even The Title Company. You can choose an Attorney to hold it.

If you are making clean offers with few contingencies, a short escrow. proof of funds for closing and/or Pre-Approval Lender Letter, the size or type of earnest money shouldn't be an issue. The Seller wants to avoid taking their property off the market for a "What If, Maybe some day" offer. So, If you are making weak offers, be prepared to put up some decent consideration.
0 votes
Search Advice
Search
Ask our community a question

Email me when…

Learn more