Is it common to put a commercial property under contract without the use of earnest money?

I know it can be up to the seller, but my question is more or less about the frequency of using earnest money. Do you guys use it in every deal, or is it something that can be used only as an advantage over another buyer?
In Buying Property - Asked by JAMES S. - Feb 18, 2009
Report Abuse
Answer this Question

Answer(s)

Matt D.
Owner/Investor
Franklin, TN

Well, it certainly signals the seller that you aren't serious...unless you plan to close on the deal within 48hrs.

Feb 18, 2009
Report Abuse
Bruce R.
Broker/Agent
Woodinville, WA

As a practicing broker I have advised my clients on occasion to enter into contracts without earnest money. They have all closed. These are usually situations where the buyer is going to have to do a lot of work to get the property ready to close, e.g. engineering studies, architectual work, surveys and so forth. This may represent a substantial investment on the part of the buyer and the work product can be delivered to the seller. I will put a series of checkpoints into the contract which allow the seller to exit the transaction if the benchmarks are not met. Finally, at some point, earnest money will have to be posted but after the buyer has become comfortable with the outcome of the planning process.
BLR

Feb 18, 2009
Report Abuse
Christopher K.
Broker/Agent
Ellicott City, MD

Commercial properties generally require a lengthy study period during which the prospective buyer completes necessary due diligence. The due diligence requires the work of third parties like engineers (who complete environmental studies and boundary surveys) and appraisers. The prospective purchaser will also want to study the condition of the property, interview tenants, and work on lining up financing.
The buyer will customarily offer to put up an earnest money deposit to be held in escrow while this work is completed. Most buyers demand a 30 to 60 day due diligence "study period" during which their earnest money deposit is fully refundable if they opt not to proceed with the purchase. Even though the deposit is fully refundable during the study period, it conveys a certain seriousness in the purchasers intentions.
At the peak of the market, in some cases I saw buyers willing to put up a non-refundable deposit upon contract execution. Typically those buyers reviewed leases and other due diligence information rapidly and before signing the purchase and sale agreement -- effectively mimicking an auction purchase.
That said, at the end of the day, the amount of the earnest money deposit is a matter of negotiation between buyer and seller. The buyer wants to keep the deposit as small as possible, and the seller would like to see a larger deposit.
Christopher B. Kubler, CCIM
NAI KLNB
443-574-1415

Feb 21, 2009
Report Abuse
Chris S.
Broker/Agent
Coeur D'alene, ID

Yes. It's nearly unheard of for a seller to consider an offer without SOME earnest money. However, there are different variations of earnest money. In some instances we utilize a fully refundable EM deposit, in others we stage releases of the money over the due diligence and escrow period, in others the money is immediately not refundable and becomes more like option money, than EM.
Chris Schreiber, CCIM

Apr 1, 2009
Report Abuse

Welcome to Answers

LoopNet Answers is where the commercial real estate community shares what they know to help each other out. And it's all for free.

Ask a question to get advice from brokers, investors, professionals and local experts.

Answer questions to raise your visibility as a trusted advisor and build new relationships.

Ask a Question

Post Question