Boost your investment portfolio by investing in Chicago, Illinois, one of the US’ top gateway markets. Here, understanding how much earnest money is required in Illinois will help you cinch a successful sale.
Property developers and investors looking to build their portfolios in Chicago, one of the biggest gateway markets in the United States and the third most populous city in the country, would benefit from understanding how much earnest money is required in Illinois as well as learning about the state’s unique earnest money practices.
Home to many Fortune 500 companies and with comparatively affordable prices in a stable market with well-developed infrastructure and a vibrant cultural scene, Chicago is a haven for investors. Its diverse economy plays host to many industries, such as tourism, finance, healthcare, agriculture, and logistics.
Illinois’ commercial real estate market performance depends largely on its biggest city, which has a strong job market, highly desirable suburban areas, and a fundamental transport and economic hub.
Last year, the affluent Chicago metro area ranked fourth in the US in investment income. With both foreign and local entities eyeing Chicago as a top investment destination, savvy developers and real estate property flippers will also want to take a look at the bustling metro for possible commercial real estate purchases.
Knowing how much earnest money is required in Illinois is crucial to a successful CRE property sale. To help you understand the process of earnest money in Illinois, we’ve prepared this comprehensive guide, which will tackle the following questions:
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Before we get into how much earnest money is required in Illinois, let’s define earnest money and talk about its vital role in real estate transactions. Earnest money is a sum of money that buyers put up before a property's closing date to show the seller that they are serious about the sale. Earnest money payments are also known as a soft deposit or a good faith deposit.
If the buyer doesn't push through with the transaction and the deal falls through, the earnest money acts as compensation for the seller for their time and effort. In some cases, and depending on the contingencies the buyer and seller agreed on in the contract, earnest money can be refunded to the buyer. On the other hand, if the sale is successful, the earnest money contributes to the purchase price or covers closing costs.
Drew Stiegemeier, a mortgage banker at Frontier Mortgage in the greater Chicago area, says that “one critical aspect that deserves your attention is earnest money” as it “not only showcases your commitment to the transaction, but it also plays a vital role in the negotiation and securing of your dream home [or property].”
In the case of Illinois, things are done a little differently—the earnest money deposit is considered as part of your down payment, which is a portion of a property’s purchase price that acts as assurance to the lender that the borrower will be able to pay their regular mortgage fees, helps the lender to reduce risk, and gives the borrower better loan terms.
Option fees, or inspection fees, is a non-refundable payment (the amount will depend on the property’s purchase price) that allows the buyer to access the property during a period of between seven to 10 days. During this option period, the buyer can conduct their due diligence on the property—building and home inspections, like termite inspections and neighborhood checks.
If buyers pay the option fee, it gives them the right to terminate the contract before the option period is over, should they find something they don’t like about the property or if they change their minds.
Before we look at how much earnest money is required in Illinois, let’s discuss whether it’s required in the first place and its role in a potential CRE sale.
While earnest money is not legally mandated in Illinois to make a real estate contract legal and binding, it is considered a “requirement” in the eyes of experts and an expected practice that can add value to an offer and show a buyer’s commitment to the purchase.
The Buy Sell Love Chicago Team agrees that earnest money is crucial to sealing the deal on a CRE sale—”Without the requirement of earnest money, a real estate buyer could make offers on many [properties], essentially taking them off the market until they decided which one they liked best. Sellers rarely accept offers without the buyers putting down earnest money to show that they are serious and are making the offer in good faith.”
As it’s not legally required, some interested buyers looking to cut down on costs might decide not to pay any amount of earnest money when making an offer on a property.
Experts agree that this could be the wrong move—“You can [refuse to pay earnest money], but [it is] likely your offer won't be taken seriously then, so it's not something we recommend,” says the Buy Sell Love Chicago Team.
In terms of how much earnest money is required in Illinois, most realtors agree that it is normally between 3% to 10% of the property’s purchase price. In other US states, earnest money deposits range from as low as 1% to even higher than 10%. It all depends on how fast the markets move.
The folks at the Auricchio Law Offices in Chicago note that “there are general guidelines [to earnest money]...but there is not a set amount.”
While most US states only expect one earnest money payment from interested buyers, things are different in Illinois—there are two earnest money deposits in commercial and residential real estate purchases that buyers need to be aware of.
“The first time earnest money will come up is when the seller has accepted your initial offer,” say the experts at Auricchio Law Offices..
The Buy Sell Love Chicago Team adds that the first earnest money deposit “is usually $1,000 if you're buying a property under $1M and $10,000 if you're buying a property over $1M.”
The second earnest money payment is due after inspection and contract negotiations, which usually take about two weeks.
“Usually that second earnest money payment is 5% of the purchase price for properties under $1M and 10% of the purchase price for properties over $1M,” says the Buy Sell Love Chicago Team, and the Auricchio Law Offices says that while there is no set number, “buyers will put down anywhere between 3-10% of the [property’s] sale price.”
According to The Investor’s Edge, earnest money deposits on CRE properties normally amount to around $5,000 to $10,000.
CRE experts in Chicago say that yes, there is.
“As you make an offer on your desired Chicago property, earnest money can be a powerful negotiating tool,” says Stiegemeier of Frontier Mortgage, noting that “a higher earnest money deposit signals to sellers that you're a serious buyer, potentially giving you an edge in a competitive market.”
While there's no strict rule on the ideal amount, Stiegemeier advises that buyers should “consider tailoring your earnest money to the specifics of the transaction and the local market conditions” and says that buyers would do well to “collaborate closely with your realtor and mortgage loan officer to determine the most strategic approach.”
In Illinois, it works similarly—the earnest money is usually held by the real estate brokerage representing the seller. However, since not all real estate brokerages are set up to hold earnest money, the buyer's real estate brokerage or the seller or buyer's attorney will hold the earnest money instead.
A real estate lawyer can often be the better choice as they can take care of most closing services—such as contractual reviews—and have more knowledge when it comes to legal advice and protection.
As there are two earnest money deposits in Illinois property purchases, it’s important that buyers and sellers both be familiar with payment schedules for the deposits.
The Buy Sell Love Chicago Team breaks it down—”The first EM payment is usually due within one business day of both the buyers and sellers signing the contract. There is then a second earnest money payment due once we finish the inspection and contract negotiations which usually takes about two weeks once we go under contract.”
Along with how much earnest money is required in Illinois, knowing the different payment methods for earnest money deposits is important. In Illinois, earnest money deposits are commonly paid through certified checks, personal checks, and wire transfers and not by cash.
In other US states, like Colorado, cash is also no longer accepted as a form of earnest money payment. As always, check with a real estate agent or lawyer before you prepare your deposits.
Is earnest money refundable? Yes, earnest money deposits can be refunded to the buyer in some situations. Contingencies and disclaimers, which can be used to protect the buyer’s earnest money payment, should be worked into the contract when the buyer makes an offer. Appraisals, financials, and property or home inspection contingencies are some examples of contingencies that can be included in 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 Illinois. Interested developers, investors, and buyers can get in touch with the Illinois Division of Real Estate for further guidance.
Understanding how much earnest money is required in Illinois, along with other nuances of the earnest money process, can ensure that your CRE property investment in one of the US’ top gateway markets closes with surety and success.
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