Welcome aboard Moguls! It’s Jason Lucchesi here with you once again...
And in today’s lesson, I’m answering a question that I hear a lot from investors, and it has to do with earnest money.
But before we talk funding and the smart way I get the earnest money deposit for my deals without dipping into my own pockets… some of you may be unfamiliar with my story – I actually didn’t start out as an investor.
Jason’s 411
I came in the back door, so to speak, working as a loan officer for an Illinois brokerage firm in 2002. A couple of years later, I joined the management team at Countrywide Home Loans.
By all outward appearances, I was successful in these ventures, but I was dissatisfied and unfulfilled – I wanted to have my own business and be totally independent. It took several years, but finally in 2008 I founded my own real estate investing company, Global Fortune Solutions.
So here I am, living my dreams while still continuing to learn and grow and even pursue more dreams. And let me tell you, it feels great – to be independent and help others, like you, do the same by sharing my knowledge and lessons learned from real-world experiences.
So, let’s get to it then…
As mentioned, I’m hearing many investors asking questions about earnest money deposits, whether it’s situations with HUD, a bank asset manager that you’re trying to work an REO deal with, a short sale – whatever it is…
The question is this:
“If I don’t have an earnest money deposit, what do I do? How do I get deals done?”
I understand this dilemma because I still do this now in my business. We make several hundred offers each and every month. There’s no possible way that I can spread out $500 to $1,000 on every single deal.
Gotta Have Cash Buyers on Tap
Your first step will be to have cash buyers already lined up before you start making offers. Whether it’s HUD deals, motivated sellers who have called from mailers or bandit signs, or you’re networking at a REIA – no matter what, you must always have cash buyers in place. And I’m talking about buyers who are qualified. Not the ones who say they’re interested and then never close.
Let’s say you receive a lead from a motivated seller, and you’re able to get it at a really good discount. You already know you have a cash buyer for the deal. It’s a 3-bedroom, 1-bath property and you know it’s worth $100k. You’ve got it under contract for $45k, and all it needs is about $5k worth of work. You can sell it for $60k.
Now what?
Well, I like to use state-approved Purchase and Sale Agreements. I do not do assignment contracts. I believe that sometime down the road, assignment contracts will become illegal to use unless you’re a licensed broker Realtor. This means you either own a brokerage or you’re a licensed real estate agent in your state. Since I believe that’s coming soon, I avoid assignments at all costs…
Now, of course, there are countless investors who are assigning contracts and they do great business. It’s just not the strategy I choose. Instead, I create a separate Purchase and Sale Agreements with both parties.
Inspection Period
In the contract form for my state of Indiana, on the second-to-the-last page is a place where you can write in your own clause.
For the inspection period, I put 10, 12, or 14 days, or whatever I feel the seller will give me. I start high, and if they say ‘no,’ I can always come down. In the addendum I add:
Upon current expiration of the inspection period, buyer will make earnest money deposit 3 business days from end of inspection period.
At that point, not only do you get the 10 days, but you also get the 3 additional days. If that expires on Friday, remember that Saturday and Sunday do not count as business days, and you still have the following Monday and Tuesday. This gives you ample time to get the buyer lined up where you can get the earnest money deposit.
Remember, you have a separate Purchase and Sale Agreement with your buyer. In our example deal, we’re under contract for $45k and we want to sell it for $60k to this buyer. I am going to ask the buyer for a $1,500 non-refundable deposit. The only way I would ever give that deposit back is if something turns out to be terribly wrong with the inspection and it was not disclosed properly. If that happens, I’ll give those funds back. I’ll also receive my funds back from the seller and I walk away from the property.
This inspection-period clause that you can put into your contract will help you get out of any deal if there’s a really bad inspection report. Some properties you will buy in “as is” condition so this clause would not apply.
Now, back to the deal…
When you get the property under contract from the seller, that seller is asking for a $500 earnest deposit.
You have your buyer all lined up and his deposit to you is in the title company’s escrow account. All the seller has to do is call the title company to verify that the funds are there. Now you’re good to go – without ever having to touch any of your own funds.
Problem Solved
Working the deal in this manner solves the problem of the need to have earnest money to put down on every single property. You simply get it from your cash buyer. If your cash buyer is serious and motivated (they really want the deal), they’ll have no qualms about giving a non-refundable deposit.
If you really want to make this business work, and you want to make good offers on properties and not spread yourself too thin by putting out deposits on too many properties, this is the way to do it. Otherwise, you’ll deplete your bank account and you’ll be out of business in a hurry.
Most people who start off as a wholesaler don’t have big cash reserves to put down cash deposits on every deal. Now you have a workable solution. What I’ve described here is exactly what I do, and also what I teach private clients I work with.
To survive in this business, always keep yourself as liquid as possible.
How’s About You?
How have you been handling the cash earnest money deposit problem? Have you experienced that awful feeling of depleting your cash reserves by putting down deposits on too many houses? Let me hear from you. I love getting your feedback.
Make it a point to build a list of strong, active cash buyers.
Use contracts that allow you to add the inspection-period clause.
Set up an inspection period that gives a lengthy though time frame to line up your buyer.
Place your buyer’s deposit in escrow; this becomes your earnest money deposit.
Jason Lucchesi
Jason Lucchesi is the co-founder of real estate and marketing company Global Fortune Solutions, LLC. Jason has been in the real estate industry since 2002, where he began his career as a Loan Officer. His career flourished in the mortgage business when he accepted an Account Executive position with Countrywide in 2004. Within his first six months, he had achieved the #1 Account Executive in the Midwest territory. In January of 2006. During this time, Jason began investing part-time in multi-family rental properties while also becoming involved in wholesaling. By 2006, Jason was transferred to the Indianapolis area to save a struggling branch. He quickly took the branch out of the red into the green while also beginning to purchase distressed residential properties part-time. In 2007, Jason began pursuing his ultimate dream of becoming a full-time real estate investor and began investing in REOs in 2008. Since then, Jason has been involved with many aspects of real estate including short sales, tax sales/deeds purchasing, purchasing homes in distress, wholesaling, and many other avenues. Jason has been married to his wonderful wife Jamie since 2007, and they are proud parents to their sons Brady and Gavin.