Do you have to make an earnest money deposit when purchasing a home?
This is one of the most common questions for both first time home buyers and green real estate investors. In fact, this is a question that often still perplexes experienced real estate buyers and investors. At the very least, there are experienced investors that continue to go about this process the wrong way.
So do you have to make an earnest money deposit when making an offer to purchase a property?
Busting the Myths About Having to Make Deposits
Laws, regulations and traditions vary by location and even change over time. In most cases, an upfront cash deposit is not a legal requirement. Many laws do state something along the lines of providing “valuable consideration in exchange to make a contract valid.” However, many argue that this can be a promise to buy and a signature in ink. Terms can be ambiguous to say the least.
Of course, just because it isn’t a legal requirement doesn’t mean that you’ll get much traction without a reasonable monetary deposit.
A deposit shows you are a serious buyer and sellers like to be reassured of your confidence. However, there are those that won’t ask for a dime. Don’t be bullied or lied to regarding any deposits, but don’t expect to scoop a huge bargain unless you can flash some green.
How Much Deposit to Offer
So if you intend to make a deposit out of good faith, how much should it be?
This offer is entirely dependent on the strength of your entire package and the seller’s current situation. Certainly there are cases in which buyers and investors may get away with zero deposit. However, $1,000 or up to several percent of the purchase price may be required in other scenarios.
So be prepared to adjust your deposit strategy depending on who you are dealing with and how much you really want the deal.
Lower deposits may be available on deeply distressed properties or with those you have already established credibility with. Another source of low down payment deals can be HUD home auctions.
Exposure and deposit demands may also be reduced by your reputation, providing Proof of Funds letters, closing fast, and even breaking up the deposit into several installments if the closing is going to be months away.
Always deposit with your own title company or real estate attorney when possible. This will reduce risk of loss and expedite its return if the deal falls apart.
