For many real estate investors, buying commercial properties to sell feels like a whole other animal from residential. The sourcing and buying of commercial real estate can indeed run on a much longer timeline, but that doesn’t mean it should intimidate you from a great deal. When it comes down to it, once you find that gem of a property, the process will feel very familiar if you’ve purchased real estate in the past. That includes the crucial beginning of the contract of putting down earnest money for commercial properties.
Earnest money is a negotiable variable in commercial properties, just like residential transactions. The amount and terms will come down to how hot the marketplace is and the size or condition of the property for sale, and is usually refundable.
So let’s first clear up what I mean by “earnest money,” where it goes, and how to get it back. Plus, I’ll give you a quick tip I like to use to secure my spot above my competitors in a tough real estate market. Let’s dive in.
Earnest Money for Commercial Properties and Where Does it Go?
Earnest money is a pre-deposit deposit. It’s the money that you put up to secure your place above all other potential buyers. It’s not a down payment like the one your mortgage company will want, so don’t worry that you’ll be on the hook for another 30% of the purchase price. In most cases, it’s not that much – usually anywhere from $50 to a few hundred for residential, and $5,000 – $10,000 for commercial.
New investors are often wary of giving earnest money over as they worry that the seller will take their deposit and run. While most sellers in real estate are honest who would hold their end of the bargain, it’s still not necessary to give earnest money directly to them. What I recommend doing is giving it over to a third-party intermediary like a title company. That way, you’ll have receipts showing your deposit in addition to clear terms for refunds and won’t have to worry about your seller skipping out with your hard-earned money.
Is Earnest Money Refundable?
Earnest money is often refundable, but it depends on the terms of your contract. Don’t assume one way or the other, especially in a hot market. Have your attorney check over the contract before agreeing to any amount and amend the terms if need be. Remember that there will always be another property out there so if your seller is pushing for terms that make you uncomfortable there’s no harm in walking away.
What will usually happen is that your ability to receive a refund will be tied to certain deadlines that you, as the buyer, cannot go past. The timelines will usually be fair, so don’t feel like you’re being rushed to make any decisions. The deadlines are established so that you, as the buyer, have time to do your due diligence before moving forward with the contract. They also protect the seller from entering a contract that’s stuck in limbo for an unreasonable amount of time.
The most common deadlines you’ll see are for inspections, appraisals, and loan denials.
The inspection is often first and is your opportunity to go through the home with a licensed professional to make sure you have a complete understanding of what it is you’re buying. This is also an important time to make sure there aren’t any liens or second positions on the property.
The appraisal period is when the purchase price is compared to the home’s market value to ensure that you’re receiving a fair deal.
The loan denial period is for you to follow through with securing your mortgage through a lender. If your pre-approval is revoked before this deadline and your contract states you’re owed a refund of your earnest money, you’ll be able to walk away with your deposit.
Earnest Money Variables You Should Negotiate
The good thing about earnest money is that, other than the deadlines, most things associated with it are negotiable.
The most critical variable is the amount of money you’re putting down. There are no rules that go along with this; you could offer $50 in earnest money and see if it’s accepted. Don’t feel like you have to make a big show by plunking down thousands of dollars; ask the seller what amount they’re looking for and negotiate from there until you find an amount you’re both satisfied with.
Should You Ask for a Refund of Earnest Money?
This is a tip I like to use in competitive markets. If there’s a property I’m really interested in getting and want to win over the seller’s favor, I’ll offer a non-refundable earnest money deposit.
This will get built into my costs, of course, but is a way to show that I’m committed to following through on this contract. Doing this is not a requirement whatsoever. If you’re in a non-competitive market or are buying a property that isn’t publicly listed, it wouldn’t make much sense to offer up your earnest money with no strings attached. Use your best judgment in this case.
How Much Earnest Money Should I Give a Commercial Property Seller?
While the amount you offer for earnest money is negotiable, it’s a different ball game than residential. In residential properties, you can sometimes get away with only $50 or $100. With commercial properties, expect to put down anywhere from $5,000 – $50,000 or even $100,000 in earnest money.
That’s a huge range, I know. It’s difficult to put down a specific amount due to the unique variables that come along with commercial properties. The size, condition, use, amenities, location, and other factors will play a massive part in what amount will be expected.
Another important factor is whether or not an agent is representing the seller. I’ve found that when there’s a seller’s agent involved, they’ll want a higher earnest money deposit. I’m not entirely sure why, as it’s not like they’re getting a cut of it, but it’s just one of those things.
If you’re dealing with the seller directly, though, you should be able to offer a deposit on the lower end.
Putting down earnest money for commercial real estate has some similarities to residential. The most significant difference comes down to the amount of money you should expect to put down. But don’t feel that you need to give in to an agent’s demands! Remember that earnest money terms are negotiable, and the more you understand how to play the game, the better off you’ll be at your first commercial purchase. Give one of my negotiation tips a shot, and let me know in the comments how it worked for you.