Understanding how earnest money deposits in Arizona work will assist you in securing a successful CRE sale in Phoenix, the US’ second hottest market to watch for 2024.
Investors and commercial property flippers eyeing Phoenix as an investment destination would benefit from learning about earnest money deposits in Arizona, one of the United States’ leading business-friendly states, thanks to notably low corporate taxes and a pro-business environment.
Arizona’s positive business climate has grown local businesses and enticed many new ventures hoping to launch headquarters in the strategically located Grand Canyon state, which is sandwiched between economic giants California and Texas.
Arizona's relatively affordable commercial real estate, in comparison to its neighbors, is a compelling factor driving investment, particularly in its capital, Phoenix. In addition, Arizona ranks third in the country when it comes to the appreciation of real estate.
Named as one of the top “markets to watch” in the US by Urban Land Institute’s Emerging Trends in Real Estate Report for 2024, Phoenix is bursting with growth.
Source: Urban Land Institute
In the report, Phoenix secured the second spot in a list of the hottest overall real estate markets in the US, trailing behind Nashville, Tennessee and slightly edging out Dallas-Fort Worth, Texas.
It’s worth noting that the city recently scored its largest multi-building industrial business park acquisition in Arizona’s history—real estate development firm Creation struck a massive $184M deal with Prologis, Inc., for the sale of the 170-acre Airpark Logistics Center in Goodyear, Phoenix.
Investors wanting their piece of Phoenix real estate action will want to carefully study the pivotal role of earnest money deposits in Arizona’s commercial real estate transactions.
In this comprehensive guide, we’ll take on some of the most common questions on earnest money deposits in Arizona, namely:
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How much is an earnest money deposit in Arizona?
Source: PICRYL
The right earnest money deposit in Arizona can aid in the success of your commercial real estate transaction.
A familiar term in real estate, earnest money can be a little tricky to understand, as practices can change from state to state. Earnest money (different from a down payment) is a sum of money that buyers put up before a property's closing date to show the seller that they mean to push through with the sale. Earnest money payments are also called “soft deposits” or “good faith deposits” and are there to protect both buyers and sellers.
If the buyer fails to proceed with the transaction, the earnest money goes to the seller as compensation for their time and effort. Depending on the agreed-upon contingencies in the contract, the earnest money might be refundable to the buyer. Conversely, if the sale is completed, the earnest money is applied toward the purchase price or used to cover closing costs.
In commercial real estate, the earnest money deposit is used to “demonstrate the buyer’s intention to purchase the property—that they’re indeed a serious buyer,” says David Luke, Senior Vice President of Transaction Management in CommLoan, Arizona, noting that “without earnest money, the seller has little reassurance that the buyer won’t walk away from an agreed-upon deal.”
While earnest money deposits in Arizona are not legally required for a real estate contract to push through, they are considered a common feature of most commercial real estate agreements, can add value to an offer, and can display a buyer’s commitment to the purchase.
Yes, you can negotiate earnest money deposits in Arizona. In fact, experts say you should always prepare to negotiate the best possible agreement terms in commercial real estate transactions, such as whether or not the earnest money can be refunded.
“Because earnest money deposits aren’t standard across all deals, this is one of many details that buyers and sellers should be prepared to negotiate,” says David.
David shares two earnest money negotiating topics that all buyers and sellers should know about—general demand (“specifically stating what makes a property desirable or undesirable”) and contingencies such as inspection and financing.
“Contingencies can have an inverse relationship with earnest money,” David explains. “Giving up contingencies removes potential pitfalls that could cause a seller to forfeit earnest money, so they may be willing to accept less. Adding contingency requirements increases potential pitfalls, so sellers may want more reassurance in the form of a larger deposit.”
According to The Investor’s Edge, the appropriate amount of earnest money deposits on CRE properties is around $5,000 to $10,000.
In terms of how much earnest money is standard in Arizona, most realtors agree that it is the same—usually 1% of the property’s purchase price, which places many earnest money deposits in the $5,000 to $10,000 range (1% of $500,000 to $1 million).
However, “if you’re a highly motivated [property] buyer and can afford it, providing more than 1% earnest money during the negotiation process can make you more likely to be the lucky one who gets the purchase agreement,” says investor and advisor Brian Reese of District Lending in Arizona.
Buyers in Arizona CRE transactions should be prepared to pay higher earnest money deposits on highly desirable properties, which could see earnest money deposits in Arizona ranging from 5% to 10%—and in some rare cases, 15%— of the sales price.
On the other hand, sellers having a hard time moving undesirable properties in lukewarm to cold markets might settle for sub-1% earnest money deposits.
In other US states, earnest money deposits range from 1% to even higher than 10% in faster-moving markets.
In most parts of the US, like Florida, the listing agent holds the earnest money in their escrow account until closing. In other states, such as Illinois, the buyer's real estate brokerage or the seller or buyer's attorney can also hold the earnest money.
Arizona earnest money law dictates that the earnest money isn’t made directly to the seller—it’s made to an escrow account held by a third party, like a title company or bank. This safeguards the earnest money, ensuring that it will be available once the transaction is complete. This prevents dishonest sellers from pulling the deal and taking the money.
Staying on top of timelines and due dates is crucial to the success of your Arizona CRE transaction. While you most likely will be working with a real estate broker or agent who will handle the process, it’s good to have the details clarified so you can personally keep track of your payments.
So when is earnest money due in Arizona?
MacQueen & Gottlieb, PLC note that in Arizona, “earnest money is due within 24 hours of the noted acceptance date of the real estate contract by the buyer.” If the contract is signed in the late afternoon on a Friday, however, the earnest money will likely not be deposited in the escrow account until the next business day.
Arizona earnest money law says that “all earnest monies shall be deposited in the escrow account or trust fund account no later than the close of the second banking business day after receipt.”
Along with knowing how much earnest money deposits in Arizona should be, knowing the different available payment methods for earnest money deposits is important.
While some US states, like Texas, still accept earnest money payments in cash form, most states like Colorado and Arizona no longer do.
In Arizona, “your earnest payment will be sent to the escrow company via a wire transfer, personal check, or certified check,” Brian says, though “some escrow companies may not accept a personal check, only a wire transfer or certified check.”
Check with the title company or law firm on the form of earnest money deposit they prefer, or consult with your real estate agent or lawyer before you prepare your deposits.
Are earnest money deposits in Arizona refundable? Yes, they can be, in some situations.
“Whether the earnest money for a commercial property is refundable depends on the specifics of a purchase contract, and how the purchase process unfolds. Which party is responsible for a deal falling through is one of the biggest factors that determines whether an earnest deposit is refunded,” explains David.
To protect the earnest money, it's important to include certain safeguards in the offer contract. These safeguards, like property appraisals, financial checks, and home inspections, help ensure the buyer's money is secure within the purchase agreement.
There are several ways that prospective buyers can protect their earnest money deposits:
Working closely with seasoned real estate lawyers can keep you and your earnest money deposits protected as you navigate the process of buying commercial real estate property in Arizona. Interested developers, investors, and buyers can get in touch with the Arizona Department of Real Estate for further assistance and legal advice.
Understanding how much earnest money deposits in Arizona are, along with other earnest money practices, will spell success for your CRE property investment in the US’ second hottest market to watch for 2024.
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