Many real estate investors are drawn to the lure of no down payment: investing in real estate without risk or using any of your own money.
So if you’re going to wholesale real estate to other investors, how do you really do it with no money down or at least your own money, when most sellers are going to want to get some money as collateral? That is what I am going to cover in this article.
Without giving you legal advice or boring you with technical jargon, earnest money is the money you put down with a real estate purchase contract to show the seller that you’re serious about buying their home. Typically, if you default on the contract (in most cases, that means buying the house), the seller keeps the earnest money he paid on the contract.
Often, real estate investors put up as little money as possible. However, keep in mind that larger down payment deposits can show your level of seriousness to a seller, which could result in your offer being accepted over similar offers with less down payment.
So when we wholesale real estate, how do we deal with escrow money?
First, when we sell a wholesale contract, I like to try to negotiate to have the security deposit due after the inspection period. At the end of the inspection period, we should have our investor buyer lined up and ask them to put down the escrow money to show they are serious about closing the deal.
Second, how much should we put down as an earnest? In most cases, if you’re buying, you’re trying to pay as little as possible. If you’re selling, you want the buyer to put up as much as possible. So when we wholesale, we can try to negotiate the amount the seller needs as low as possible. But, when we’re trying to get our investor buyer to commit to buying, we’d like to get everything we can to make sure they close.
As a final option, some investors even use promissory notes as collateral. You should consult your legal counsel to determine the laws in your area regarding the use of this strategy.