Earnest money deposits remain one of the most controversial parts of a real estate transaction. Losing deposit money is expensive, and it can happen to even the best investors. Some are so afraid of losing the precious little deposit they have, it holds them back from buying homes and investing in real estate. Others don’t have enough appreciation for the risk of loss, or what seizing a buyer’s deposit can mean for a family, or the industry for that matter. Fortunately there are a variety of ways that homebuyers and real estate investors can minimize, and even prevent losing their next earnest money deposit.
Don’t Make a Deposit
The easiest way to avoid losing deposit money is simple: don’t make a deposit. That may sound impossible to some that are in markets where Realtors are constantly pushing for high figure deposits. However, many experienced real estate investors report that they do this on a regular basis. Some will try to argue that making a monetary deposit is mandatory. Others simply don’t agree. Not every Realtor or seller is going to buy it, but that doesn’t mean it isn’t possible. Look for highly motivated sellers. Find ways to close on deals faster, such as using hard money loans, or paying cash. If you can close in a few days, you probably won’t have to make a deposit.
Make Smaller Deposits
The smaller the deposit, the less buyers stand to lose. Some sellers and their agents are going to demand multiple percentages of the purchase price, or as much as buyers claim they will make as a down payment. Shoot for $500 or $1,000. That’s all that HUD asks for. This may not work for some deals. Some real estate agents and wholesalers with hot deals are going to hold out for more money to guarantee their profit. Another option is breaking up the deposit into several pieces, especially for longer closings. At least try to make the bulk of your deposit after your due diligence is complete.
Only Make Deposits with Your Trusted Business Partners
Again, some sellers and agents are going to try to force buyers to make deposits directly to them, or their real estate brokerage’s escrow accounts. If it is a must have deal, buyers may have no choice but to take the risk. However, in most cases, this money is as good as lost if the deal doesn’t close. If the seller doesn’t demand it, there is a good chance the real estate broker will. Those that want to minimize the risk of losing their deposits will insist on making the deposit with a title company or real estate attorney of their choosing. Even consider skipping the argument process by making the deposit when you make the offer.
Good Contracts
If you absolutely have to make a deposit, and have to make a sizable deposit, the best defense is going to be your real estate contract. Get in as many protective contingencies as possible. That means appraisal contingencies, financing contingencies, and inspection contingencies. Make sure you act quickly within the grace periods for these contingencies, and ask for your deposit back promptly if the deal doesn’t work out. Make sure you give yourself enough time to close. If it looks like your closing may be delayed, make sure you obtain a signed extension immediately, so that you don’t risk your deposit being forfeited.
Fighting for Your Deposit Back
What can buyers do when they do get into an earnest money deposit dispute? Speed is of the essence. If you can get the escrow company to return your deposit immediately, you’ll be in good shape. If buyers run into resistance, enrolling the help of a real estate attorney is the best bet. In some cases, if the amounts are big enough and the case is strong enough, an attorney may take the case and take a split of anything they get back, if they win.
Knowing When Not to Fight Back
If the seller or selling broker have their hands on the money, it can be incredibly difficult to get back. Even if you are in the right and there is hope of winning, the other side can often tie up the case in the legal system long enough to cost you more than you can get back. Know when to stop throwing more good time and money after bad. Know when to cut your losses. If you are going to be investing in real estate and bidding on properties that require deposits, make sure you are factoring in potential losses. What is your closing ratio? If you are only closing four out of five contracts you sign, you need to factor that potential for loss into your profits on your other offers and budget.
