Almost every CRE deal now requires a good faith deposit, so CRE investors must understand what good faith deposits are about and how to get them for every deal.
The growing importance of good faith deposits in commercial real estate has made it an important consideration for investors who are seeking to build a portfolio of profitable CRE properties.
In today’s CRE market, the investor with quick and regular access to good faith deposits can snap up all the good properties while others are left scavenging for what remains.
Good faith deposits became important as a way for sellers of commercial real estate to differentiate serious buyers from those who are just researching the market or catching cruise. Without it, sellers will not schedule inspection or even continue the negotiation process.
As an investor, it is now essential for you to understand what good faith deposits are, how they have shaped the CRE market, and, most especially, how you can have constant access to them so you can gain a competitive advantage in the industry.
In this article, we will explain everything you need to know about good faith deposits in commercial real estate. We’ll cover:
[Are you ready to gain competitive advantage over other CRE investors? Sign up to Duckfund for consistent and quick access to good faith deposits for all your commercial real estate deals.]
Good faith deposit, also known as earnest money deposit (EMD), is an amount that the intending buyer of a property must pay to show that their interest in the property is serious and expressed in good faith.
Sellers of CRE properties (and their real estate agents) have been insisting on good faith deposits as a way to quickly get their properties off the market instead of wasting time on those whose interest is neither serious nor expressed in good faith.
In response, investors have also seen good faith deposits as a way to gain competitive advantage over others. They do this by either making sure they have a ready source of good faith deposit or offering to pay a good faith deposit higher than what the seller requires (or by doing both).
Good faith deposits should, however, not be confused with other “deposits” in use in the CRE market.
A good faith deposit is different from a down payment. The latter is a deposit made when an investor is financing the purchase of a property with a mortgage. In essence, while a good faith deposit is between the buyer and seller, a down payment is between the seller (now borrower) and the financing company.
It is also different from a due diligence fee. Due diligence fees are paid when a buyer is requesting a due diligence period in which they can conduct certain checks and inspections on the property (including ownership verification by a title company) before they can continue negotiation. The fee is a compensation to sellers who have to sell their properties on longer timelines.
Furthermore, due diligence fees are non-refundable while good faith deposits are. Due diligence fees are also smaller than good faith deposits and they are not as widespread in usage as good faith deposits.
While good faith deposits have become crucial to all types of CRE deals, it will interest you that there is no legal requirement to pay them. In other words, a good faith deposit is a norm rather than a legal requirement.
This does not mean, however, that matters pertaining to earnest money deposits have not graced the law courts. There have been cases regarding how earnest money is to be treated when the intending buyer and seller decide not to go through with the deal (more on that in a minute).
It bears mentioning that the fact that earnest money requirement is only a norm does not mean you should take it for granted. Most sellers of commercial real estate property (retail, warehouse, office, multifamily, industrial, etc.) require it and, as we have seen, buyers are now seeking to outbid one another. As long as you want to continue to be a player in the CRE market, you need to follow this norm.
Since it is not a legal requirement, there is no government legislation or pronouncement guiding how much earnest money sellers can require.
Typically, good faith deposits are a percentage of the property’s purchase or sale price; but the exact percentage that you will pay will vary from one state to another. And you can expect hot markets like Florida, Texas, Georgia to have higher requirements.
Duckfund has done the hard job of surveying various states and determining the range for good faith deposits in them. The nationwide survey can be summarized in the following points:
Though a percentage of the purchase price is common, there are some states where some sellers agree to collect a fixed amount instead. For example, you can expect to pay between $500 and $2,000 in Nebraska and between $500 and $5,000 in South Dakota.
Regarding payment, note that while cash is still available in places like Texas, those in Colorado might not accept it. Other options include cashier’s check, certified check, personal check, and wire transfers (or bank account transfers).
To make payment easier, some sellers (especially in Illinois and Rhode Island) will also allow you to pay in two installments – one after contract signing and the rest after the due diligence period.
Everything we have said so far will suggest that good faith deposits will be in the provenance of the seller. Not really!
While the seller determines what will be paid (and how), the money is held by an escrow agent or escrow company (a third party that is different from the brokerage companies facilitating the deal). The money remains in the escrow account until the intending buyer and seller have concluded negotiations.
If the negotiations are positive and both parties agree to the deal, the earnest money will then be used to pay the closing costs of the deal or as part of the downpayment for the property (in the event that the buyer is using a mortgage to finance the purchase).
But what happens when both parties do not agree to the deal?
Earnest money is refundable if the deal falls through (does not succeed) provided that the reason for the failure of the deal is part of previously-agreed contingencies in the purchase agreement.
The most common contingencies are:
Source: Meta Wealth
In addition, if it’s the seller that is canceling the deal, the buyer will have a right to a refund.
Problems arise when the buyer is the one canceling the deal and the reason is not part of the stated contingencies in the contract terms. These are the situations that end up in courts. Traditionally, the court will favor the seller in such cases and the earnest money will be non-refundable.
Refunds are typically processed within 10-14 days from the day the buyer and seller agree to it. In cases where there are disputes, the whole process can be dragged through the courts which may delay the receipt of the refund (provided the courts rule in the buyer’s favor).
As we said in the introduction, a consistent source of good faith deposit is now a good way to gain competitive advantage in the CRE market.
But CRE investors are not always liquid. This is especially true for those who rely on mortgages to finance their real estate investments. It is only when earnest money deposit has opened the way that you can even get to the stage of securing a mortgage deal and completing the transaction.
Consequently, many investors who have the ability to secure mortgage deals or other types of financing when the deal has been completed have not been able to get a foot in the door because of illiquidity.
Banks have not been very helpful with their bureaucracy and stringent requirements in a world where speed is now very important. Those who have sought online lenders have been chased away by the high interest rates.
Even the SBA 7(a) loans require collateral and credit reports while the 504 (a) alternative takes a long time to process even while imposing many stringent requirements.
Duckfund is a good faith deposit financing company whose aim is to provide investors with a consistent good faith deposit source for all their commercial real estate transactions. Are you currently interested in 2 or 10 properties at the same time? Duckfund will provide you with the good faith deposit you need for them all.
Moreover, there are no stringent requirements. You don’t need a credit report or a collateral. What about bureaucracy? There is none of that as well. You can complete the application process in 2 minutes and get the needed cash in just 48 hours.
Unlike generic online lenders, Dukcfund caters specifically to CRE investors and so it charges a low financing fee (paid upfront) that will make it easy for you to pursue many deals at once without breaking the bank.
Finally, Duckfund employs a low-risk, simple, and safe process to disburse good faith deposits.
Once your application is successful, Duckfund will open an LLC on your behalf. It is this LLC that will sign the purchase contract or agreement with the seller. Also, the good faith deposit will be transferred to the escrow through the LLC.
If the deal goes through, then all you need to do is pay back the good faith deposit to get a 100% stake in the LLC. On the other hand, if the deal fails and you have a right to a refund, you won’t need to do anything. Duckfund will recover the deposit from the escrow and the purchase agreement will be canceled.
With growing competition in the CRE space, a partner like Duckfund will help you build a profitable portfolio, gaining competitive advantage over others who don’t have the same constant access to good faith deposits.
[Are you ready to succeed in the CRE market? Don’t let earnest money hold you down; sign up to Duckfund to get quick and cost-effective access to good faith deposits for all your deals.]
