The right understanding of earnest money deposits in Michigan will aid prospective buyers, investors, and property flippers in confidently cinching commercial real estate deals in The Great Lakes State.
With the Midwest showing the healthiest business conditions in the US in late 2023, it’s no surprise that prospective buyers, investors, and property flippers have their eyes on commercial real estate properties in Michigan. Knowing just how earnest money deposits in Michigan work will aid in successful property acquisitions in The Great Lakes State.
Primarily known as the automotive capital of the US, Detroit, Michigan is also the birthplace of Motown music. With its rich entertainment scene, relatively affordable real estate, and stunning nature (it is bordered by four out of five of the Great Lakes), Michigan is an attractive state for investment.
Downtown Detroit, Michigan
Source: Needpix.com
Most of the US has experienced an economic slowdown in 2023, with business markets softening across the country. However, despite weakening conditions, firms in the Midwest seem to be faring better.
The American Institute of Architects’ (AIA)/Deltek monthly billing index, which measures the health of the construction industry, gave the Midwest the highest business conditions score (49) in November 2023, above the South (46.7), Northeast (44.4), and the West (39.5).
Source: American Institute of Architects
The Midwest has also had the most construction throughout the year, maintaining a fairly steady level as compared to the rest of the country, which has seen higher fluctuations.
Meanwhile, though hybrid work continues to curb demand in Michigan’s office market, the state’s industrial market, particularly in Grand Rapids and other parts of West Michigan, has been performing better, though a slowdown in that sector is also expected to come.
Downtown Grand Rapids, Michigan
Source: Wikimedia Commons
Yet another draw that brings home buyers, investors, and property flippers to The Great Lakes State is the lure of underdeveloped land in high interest areas like Lake Superior.
Lake Superior
Source: Wikimedia Commons
To ensure smooth and successful real estate transactions, prospective buyers will want to brush up on their knowledge of the earnest money deposit process in Michigan.
In this detailed guide, we’ll address the most common questions on earnest money deposits in Michigan, namely:
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Source: PickPik
An earnest money deposit (EMD) is a sum of money that buyers put up before a property's closing date to demonstrate to the seller that they are serious about the sale. The right earnest money deposit in Michigan can give prospective buyers an edge and help them seal the deal on their commercial real estate transactions.
Earnest money deposits (often confused with down payments) plays an important role in the sale, with processes and amounts varying from state to state. Earnest money payments are also called “soft deposits” or “good faith deposits” and are in place to protect both buyers and sellers as they navigate the real estate transaction.
If the buyer does not go through with the transaction, the earnest money goes to the seller as compensation for their time and effort. Depending on contingencies agreed upon and spelled out in the contract, the earnest money could be refundable to the buyer. However, if the sale is successful, the earnest money is put toward the property’s purchase price or applied to closing costs.
“The [earnest money] deposit serves multiple purposes,” notes the Commercial Real Estate Agreement of the Michigan Bar Journal. “First, it may act as a condition to, or consideration for, entering into the contract. Second, it provides a real incentive for the purchaser to timely review due diligence materials. Finally, it can serve as liquidated damages for the seller if the purchaser breaches the agreement.”
What are the rules for earnest money in Michigan?
There is no Michigan earnest money deposit law that mandates the payment of earnest money in real estate transactions, “but most realtors working for the seller will advise their clients not to accept the offer due to a lack of commitment on the buyer’s part,” especially in a seller’s market, says Michigan real estate attorney, Coldwell Banker agent and founder of the Dolinksi Group, Alex Craig.
1st Michigan Realty concurs with this as a common practice in Michigan commercial real estate transactions—”Earnest money deposits are not required, but are almost always provided as evidence of the buyers’ willingness and ability to perform.”
In terms of how much an earnest money deposit in Michigan should be, “there is no set amount that qualifies as a deposit,” says the Dolinski Group. “The general best practice of ‘how much to put down’ is usually set by the market area in which you plan to buy.”
The typical earnest money deposit in Michigan ranges from 1% to 3% of the property's purchase price, though it can go as high as 5% to 10% in faster-moving markets.
Five Star Real Estate Lakeshore in Michigan notes that “earnest money deposits can be anywhere from 1% to 10% of the sales price, depending mostly on market interest.”
So how do buyers and sellers arrive at the right amount of earnest money in Michigan? “The figure is usually negotiated between the buyer’s real estate agent and the seller’s real estate agent,” says real estate and finance attorney David Soble of Soble Law, Michigan, adding that amount that a purchaser should put down “will depend on the activity in the real estate market and / or market location.”
In other US states, earnest money deposits go from from 1% to even higher than 10% in the hottest markets.
Michigan earnest money deposit law dictates that the earnest money deposit is held in a separate escrow account (usually by the seller’s broker, but sometimes by a title company or another third party) until the sale is either completed or canceled. This keeps the earnest money deposit safe.
If the transaction does not go through, both the buyer and the seller have to come to an agreement before the earnest money deposit is either refunded to the buyer or given to the seller.
In most US states, such as Florida, the listing agent holds the earnest money in their escrow account until closing. In other states, like Illinois, the buyer's real estate brokerage or the seller or buyer's attorney can also hold the earnest money.
Yes, you can negotiate earnest money deposits in Michigan. In fact, experts say that negotiating to get the best possible agreement terms in commercial real estate transactions is part of the earnest money process.
“Your earnest money deposit should be seen as a tool to help you get what you want,” says Alex Craig. “The right deposit could sweeten a deal, it could help you win a bidding war, or even get the [property] for a lower price.”
In Michigan, the earnest money deposit is normally “delivered by the purchaser upon entering into the purchase agreement or shortly thereafter,” says the Michigan Bar Journal.
According to 1st Michigan Realty, Michigan earnest money deposit law “requires a salesperson to turn over any deposit check to his/her broker and the broker, in turn, to deposit the check ‘within two banking days after the broker has received notice that an offer has been accepted.’”
Along with knowing how much earnest money deposits in Michigan should be, knowing the different available payment methods for earnest money deposits is crucial.
While some US states, like Texas, still accept earnest money payments in cash, most states like Colorado and Michigan no longer do.
In Michigan, “Earnest money is usually paid by certified check, personal check, or a wire transfer into a trust or escrow account that is held by a real estate brokerage, legal firm, or title company,” says Five Star Real Estate Lakeshore.
Check with the title company, escrow company, or law firm on the form of earnest money payment they prefer, or speak with your real estate agent or lawyer before you prepare your deposits.
Are earnest money deposits in Michigan refundable? In some scenarios, they can be.
“The usual practice is for the deposit to be non-refundable to the purchaser after the expiration of the physical inspection or due diligence period,” says the Michigan Bar Journal. “However, this may be modified based on the parties’ bargaining power. If the purchase agreement allows the purchaser to extend the due diligence period, additional deposits may be required.”
As protection for the earnest money deposit, it's crucial to include certain contingencies in the offer purchase contract. These safeguards, such as property appraisals, financial checks, and home inspections, ensure that the purchaser’s money is secure within the purchase agreement.
There are several ways that prospective buyers can protect their earnest money deposits in Michigan:
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 Michigan. Interested developers, investors, and buyers can get in touch with Michigan Real Estate Services for further assistance and legal advice.
Understanding how much earnest money deposits in Michigan are, along with other earnest money practices, will spell success for your CRE property investment in The Great Lakes State.
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