Earnest Money Deposits in Tennessee: What You Need to Know Before Making an Offer

Nashville is one of the nation’s top 5 commercial real estate markets, making investments in Tennessee worthy of further research.

Knowledge about earnest money deposits in Tennessee is necessary for investors looking to profit from one of the US’s most-booming commercial real estate markets. Indeed, many sellers won’t even consider your offer in this state without proof of earnest money.

Without this cash on hand, you could be locked out of the diversity, affordability, and growth that the Tennessee CRE market has to offer.

The low unemployment rate in the state has also made it an attractive destination for job seekers and growth in manufacturing, tourism, health, and education continue to contribute to a strong economy, according to Door Loop, a property management software.

Furthermore, the demand for multifamily housing, office spaces, and storage warehouses is growing, according to Southeast Venture, a real estate firm operating in Nashville, Tennessee, as the strong economy continues to attract businesses and job seekers alike.

Earlier this year, iOptimize Realty, a tenant representation firm, listed Nashville as one of the top 5 cities for commercial real estate investment.

“Nashville has quickly become the strongest city for commercial real estate investments,” they said. “With its vibrant music scene, booming economy, and low cost of living, it has become a popular pick for those looking for an optimal location for their business.”

earnest money deposits tennessee

While the Tennessee market holds many opportunities for profitable investments, inadequate knowledge about earnest money can keep you out. Many CRE sellers will not even negotiate with you or allow you to inspect the property without earnest money.

To avoid this scenario, we will provide you with all the information you need about earnest money deposits in Tennessee. We’ll cover:

  1. What is an earnest money deposit?
  2. Earnest money demand in Tennessee: How much is required?
  3. What payment methods are allowed for earnest money deposits?
  4. How are earnest money deposits handled?
  5. How to secure earnest money financing for your CRE deals

[Are you ready to build a profitable portfolio of CRE properties in Tennessee? Register on Duckfund to quickly access the earnest money you need to start negotiating with sellers and inspecting properties.]

1. What is an earnest money deposit?

An earnest money deposit (EMD) is an amount that real estate sellers require potential buyers to pay as a sign of their serious interest in the property.

The need for real estate sellers to separate serious buyers from those who are just doing market research has led to the popularity of earnest money deposits (also called good faith deposits) in the US real estate market.

In today’s market, sellers (or the real estate agent representing them) won’t negotiate or even schedule inspection if the potential buyer has not shown commitment by paying the earnest deposit.

Interestingly, in competitive CRE markets, buyers are now using earnest money deposit requirements to gain a competitive advantage over others. Some can offer to pay 10% earnest money when others are paying 5% in a bid to convince the seller to choose them out of the pack.

Earnest money deposits vs down payment

There is a difference between earnest money and down payment.

The latter is paid to the financial institution financing the deal as a show of the borrower’s ability to pay back while the former is deposited with an escrow (more on this later) while the potential buyer and seller keep working on the deal.

In essence, the down payment is between the lender and the buyer and it is paid when the buyer has struck a deal with the seller while the earnest money deposit (also called soft deposit) is paid at the very beginning of the interaction between the seller and potential buyer.

Earnest money vs due diligence fees

Earnest money is also different from due diligence fees.

Due diligence fee is money the buyer pays to the seller in exchange for the buyer taking their time to conduct due diligence (title search, property condition, etc.) on the property in question.

The purpose of due diligence is to certify that the property is as advertised and there are no lingering faults that will affect the property’s value.

While due diligence fee is paid at a later point in the transaction, earnest money is the gate opener. Also, due diligence fees results from the buyer demanding time to do thorough inspection while earnest money is demanded by the seller as a sign of good faith.

Earnest money vs option fees

Earnest money should also be differentiated from option fees.

Though option fees can be considered a synonym for due diligence fees, it might be useful to differentiate them.

Option fee is money paid by the buyer to the seller for a right (but not an obligation) to cancel the real estate contract within a usually short period of time.

The option can be exercised if the buyer was unable to secure funding for the transaction or they discovered that there are some liens on the property (for example), making it unwise to continue with the transaction.

In essence, the ground for opting out of the contract goes beyond due diligence matters (with financing difficulty being a popular reason).

While earnest money is recoverable (more on that below), option and due diligence fees are not. Also, option and due diligence fees are for a defined period while earnest money once paid is valid until the deal is either finalized or canceled.

2. Earnest money demand in Tennessee: How much is required?

As said in the introduction, Tennessee is known for the affordability of its properties. This also spills over into its earnest money deposit requirement.

In Tennessee, like many other real estate markets, there is no set rule or state legislation regarding how much must be paid as earnest money.

Therefore, it depends on negotiations between the buyer and seller and factors like the popularity of the property and how soon the seller wants to turn the property to cash, among others, can determine rates.

However, in a nationwide survey we did, we discovered that the average earnest money deposit requirement in Tennessee is only 1% of the purchase price, which makes it one of the states with the lowest earnest money requirement.  

While agreeing that there is no set rule, Nashville SMLS, a real estate listing website, noted that “a buyer will often pay an amount that falls within 1 and 2 percent of the purchase price of a home.”

Nashville on the Market, a real estate brokerage, also agrees that the usual earnest money deposit in Tennessee is 1% of the purchase price.

However, “Larger earnest money deposits show that the buyer is serious about the property, perhaps a better risk than other potential buyers, and can enhance a buyer’s offer in multiple offer situations,” according to Greater Chattanooga Realtors. “A smaller earnest money deposit doesn’t necessarily, but might, indicate a less serious buyer or their financial ability to complete the purchase.”

earnest money deposits tennessee

The point they are making is that while 1% of the property’s price is standard, you can go over and beyond to offer something more as a way to gain a competitive advantage over other potential buyers.

3. What payment methods are allowed for earnest money deposits?

Cash, check, ACH, and wire transfers are the common methods for making earnest money deposits.

In some markets like Texas, Colorado, and Arizona, cash deposits are no longer required.

Cash is still legally allowed for various real estate transactions in Tennessee so you should not have any issues paying earnest money in cash if you so desire.

However, best practice dictates that you use wire transfer, ACH, or check.

“Generally, this deposit is delivered when the purchase agreement or property appraisal is signed,” according to Nashville SMLS, quoted above. Most sellers will give you a one business day grace to make the deposit after the purchase contract has been signed.  

4. How are earnest money deposit handled?

A more important question is how your earnest money is handled.

Earnest money deposits in Tennessee are handled the same way as other real estate markets so the answers that follow apply generally.  

Where is earnest money held?

We have said previously that earnest money is held by an escrow who is a real estate professional acting on behalf of both the seller and the buyer. This is unlike down payment which is held by the lender and option (due diligence) fees which is held by the seller.

“Typically, earnest money is held by a third party called an “escrow agent” or “escrow holder,”” said Tennessee Title Services, a title, insurance, and closing company. “The escrow holder may be a title company, a real estate office, an attorney's office, or any other party designated in the contract.”

earnest money deposits tennessee

How is earnest money used?

“Assuming that all goes well and the seller accepts your offer, the earnest money will go toward the down payment and closing costs,” according to Nashville on the Market, quoted above.

Said differently, when the deal succeeds, your earnest money can be used to cover part of the closing costs of the deal or you can add it to the amount that you will deposit as down payment with the lender financing the deal.

Are earnest money refundable?

What if the deal does not go through?

Earnest money can be refunded when the deal fails subject to two provisions:

First, the reason for the failure must be part of the agreed-upon contingencies during the signing of the purchase and sale agreement. Some of the popular contingencies include:

  • Financing contingency: This allows you to opt out of the deal if you can’t close the financing deal you were depending on.

  • Appraisal contingency: If the seller decides to increase the price of the property down the road, you can opt out of the deal.

  • Inspection contingency: If you discover some hidden faults with the property during inspection, you can forfeit the deal.

  • Sale contingency: If your purchase depended on the sale of another property, you can withdraw from the deal if the sale does not succeed.  

Second, if it is the seller opting out of the deal (for whatever reason), then you can get back your earnest money from the escrow.

Releasing earnest money is not hard as long as both parties have agreed to terminate the deal. The challenge comes when you (as the buyer) are opting out of the deal for a reason that is not part of the agreed-upon contingencies.

In this instance, you will most likely not get a refund except the seller is generous enough to agree to the refund.

However, in the event that the seller plays hardball, the issue might be settled in the court through what is called an interpleader proceeding which Tennessee Association of Realtors define as “the court action that the holders of earnest money can take to determine who is entitled to the funds in the event of a dispute between the buyer and seller.”

Generally, the number of days it will take to get a refund depends on the buyer, seller, and escrow though there are certain regulations guiding this process in Tennessee.

First, the Tennessee Real Estate Commission states that “trust Money shall be disbursed in a proper manner without reasonable delay.”

Second, there is a requirement that the funds must be disbursed within 21 days from the date the buyer and seller have sent in a written agreement or the interpleader proceeding (see below) have been concluded.

5. How to secure earnest money financing for your CRE deals

Most CRE investors (and homebuyers) often focus on how to secure financing to pay the purchase price and closing costs of a property of interest. Consequently, they don’t have the cash to pay for earnest money deposits at the beginning of the deal.

This can be a very serious problem, especially in competitive markets, as more cash-ready investors sweep all the good investment deals.

But it doesn’t have to be this way.

Duckfund’s sign now, pay later solution will provide you with the cash you need for earnest money deposits so you can get a foot in the door and continue negotiation for properties of choice.

You can complete an earnest money financing application in just two minutes and Duckfund will complete disbursement into the escrow account in under 48 hours without asking for your credit report. Unlike other financing options, Duckfund only charges a 2% monthly financing fee.

The days of worrying over earnest money is over. Duckfund will provide you with earnest money deposits for as many deals as you want so you can sign your deals and worry about paying back later.

[Do you want to profit from the thriving Tennessee commercial real estate market? Don’t let earnest money requirements stop you. Register on Duckfund to quickie access the earnest money financing you need to close as many deals as you want. ]

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