Simple question: why do sellers require earnest money and or pre-approval letter?

I am pursuing commercial property ownership but have limited capital so I need an venture partner. But to lure in an partner I should have a written agreement in place so they know its a viable deal and worth their time to look into it. But many times I would need an earnest money deposit and/or pre-approval letter just to submit an offer to a seller. Why wouldn't a seller take my nice cash offer and let me go and try getting it funded, why must I already have funding to even throw an offer at them?
In Selling Property - Asked by eric s. - Apr 5, 2011
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Chris R.
Broker/Agent
Denton, TX

Earnest Money is not required in order to submit an offer. Earnest money is not required in order to negotiate and enter into a contract and place a contract in the title company. Earnest money is not required to make a contract a valid contract. It is simply to show that the buyer is "earnest" in making such an offer. The offer can be made with no earnest money due until such time as a contract is negotiated and agreed upon and then taken to the title company. The earnest money can be any amount - from $1 upward - that the 2 parties to the contract can agree on. The reason for a seller - or the seller's agent - to require / expect proof of funding from the get go is that a CASH offer is just that - indicative that you have CASH in the bank such that you can write a check to close the sale. In that case - you would likely be expected to provide a letter from your bank that states you do HAVE that amount of cash in the bank. Absent that - you are offering to buy a property with $X down and the balance financed - either by a 3rd party - and/or - seller financing. If you submit an offer with 3rd party financing - again - the seller or seller's agent might expect to have some proof and indication that you DO have the credit available to obtain a loan - subject to the property satisfying the lender. Otherwise - the seller and / or the seller's agent could invest a lot of time in negotiating a contract with a party who ultimately does not have - did not have - may never have had in the past - may never have in the future - the ability to obtain a loan to buy the property at all. Seller's - and for sure - seller's agents - DON'T like to waste time showing / negotiating, etc. a contract with a buyer who can't end up buying the property and take a chance on losing out on another prospective buyer who can or could buy it. If you know you are going to be looking at a property up to $1,000,000 - then you need to have secured some general idea from a lender that given the particulars on a subject property - they would agree teo make a loan and on what terms. Likely in this market they would require you to have 20 - 25% or so down. If you don't have that available cash - you will likely not buy a property and gets back to sellers and agents don't want to waste their time on working a deal that would not go anywhere.

Apr 7, 2011
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Matthew C.
Broker/Agent
Indianapolis, IN

First off Chris R. you are spot on with the Pre-approval letter and the statements you made about the earnest money. Back to the question though.
Eric S. You stated that you have cash for this deal. In this case you do not need to have a pre-approval letter if you are buying a property with cash. All you need is proof of funds from your bank statement. As far as getting funded after you have bought the property with cash, that is a transaction banks will do all day long. Much success to you!

Apr 11, 2011
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Rob B.
Chandler, AZ

Eric.....
You have asked a simple question that likely should have a complex answer. However to keep it simple, Seller’s like to know they have a solid transaction. A broker’s livelihood comes from closed transactions. They usually always try to avoid false starts that will damage their reputation as well as their income.
Sometimes, with the best of intentions “to lure in a partner” is not as easy as it sounds. If a partner is going to have enough confidence to give you the initiating partner his or her money, they want to know that you can indeed deliver the property. If not, they will give their confidence and their money to someone that can get the job done.
You should simply work the system until you have a property and investor/s/ that will allow you to match up the property and all your good intentions with the investors. Otherwise, don’t waste the time of sellers and brokers.
For strong investors that can provide credentials and a background of successful deals, the seller will usually forego the proof of funds until the deal points have been agreed upon, but even with this type of quality investor the seller wants to see the assurance of a close of escrow through a bank letter or a large enough forfeitable deposit for a false start.
Good luck with your pursuit of the highly leveraged deal. As was said by one of our past presidents, “I feel your pain”.
Onward and upward Eric…… Rob Baird, CA RE License #544165 (One of the oldest, active licenses in CA) 951 515-5855 Email: rob@capratecommercial.com

Apr 12, 2011
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