Even as earnest money deposits have become popular in the commercial real estate (CRE) market, issues about earnest money refunds continue to be challenging. Is earnest money refundable? If so, under what conditions?
Other challenges with earnest money deposit financing include the absence of a standard rate, which makes it difficult for real estate buyers to plan and how to deal with competitive real estate markets.
We consider these challenges in turn.
Is earnest money refundable?
It depends on who is backing out of the deal and for what reason.
If the seller is the one backing out of the deal, for whatever reason, then as a buyer, you can get back your earnest money.
However, if you are the one backing out of the deal, you can only get a refund if the reason is part of the previously agreed contingencies. Some of the typical contingencies in a purchase agreement include:
- Physical inspection contingency: This allows you to conduct a physical inspection of the property before the deal is finalized. If you detect any issues of concern, you can opt out of the deal.
- Appraisal contingency: If a third-party appraisal shows that the property is overvalued, then you can opt out of the deal.
- Financing contingency: This permits you to withdraw from the deal if you are unable to secure the financing you were counting on.
- Financial records contingency: This is useful for buy-and-hold investors. It allows you to review the income and expenses of the property before finalizing the deal. You can opt out if they are not to your liking.
- Zoning contingency: If a zoning condition is not met, you can stand down from the deal.
- Environmental contingency: This permits you to conduct an environmental appraisal or due diligence before finalizing the deal.
- Property sale contingency: If the purchase of the property depends on the sale of another, this contingency allows you to withdraw from the deal if the sale does not go through.
If you have included any (or all) of these contingencies in the purchase agreement, then you can withdraw from the deal for any reason relating to them.
Any reason that was not previously agreed as a contingency does not count and in that case, you won’t typically get a refund (except the seller is generous).
How can you plan for earnest money deposits?
Though there is no national standard rate, research by Duckfund has revealed that there is a normative rate in every state. While this rate will not hold for every transaction, it is a useful guide that you can base your planning on.
The results can be summarized as below:
- 0.5% – 1%: Iowa
- 1%: South Dakota, South Carolina, North Carolina, Arizona, Oklahoma, Tennessee, Maryland
- 1%-2%: Ohio, Nevada, Nebraska, Texas, Missouri, Wisconsin, Wyoming
- 1%-3%: Kansas, Kentucky, North Dakota, California, Connecticut, Georgia, Utah, Virginia, Washington
- 1%-5%: Colorado, Hawaii, Idaho, Montana, Oregon, Maine, Vermont, West Virginia
- 1%-10%: Alabama
- 2%-3%: Mississippi
- 3%-5%: New Hampshire, Delaware
- 5%: Massachusetts
- 5%-10%: Louisiana, Florida, Pennsylvania
- 10%: Alaska, Michigan, New York
What about competitive markets?
In competitive markets, two things happen: the EMD required is higher and speed is important. The investor that can pay and do it quickly will gain an advantage over others.
If you want to purchase properties in competitive markets, you need an EMD financing source that can provide you with the amount you need at the right time. This is why traditional lenders – with their lengthy processes and stringent requirements – are inappropriate.
With an EMD financing company like Duckfund, you can complete the application within 2 minutes without submitting any credit report. And funds will get to the escrow in charge of the EMD within 48 hours.
Such reliable and fast access to EMD can become crucial if you hope to win deals in competitive markets.
