Earnest money for REO's

John, I always have my buyer put in the money for me if I need to go 10%.

Thank you GildardoH. Does that mean you let the buyer know about the house before you have it under contract?

No, I first have it under contract then I explain the situation.

I don't understand. How can you have it under contract without earnest money? In the past I've had houses under contract but they wouldn't let me sign the contract without earnest money down first. At least that's how I remember it. It's been awhile since I did my last one.

with reo's you need to have your buyer(s) ready to put up the cash when your offer gets accepted. When you first submit your offers, you can provide a copy of a check, or a letter from a transactional funding company, i.e. BestTransactionFunding, etc. but as soon as your offer gets accepted you will need your buyer to provide a 'real check' for escrow. You can make offers under an LLC, and then ad your buyer to the LLC, and remove yourself from it, so you basically wholesale the house with the LLC...

Thank you Valerie for your step by step explanation. Two questions though. Will I need the check from the buyer right away or can I put somewhere in my offer that I will give them the check in so many days after the offer is accepted to give me time to find a buyer? Second if I make offers in an LLC and take my name off and put the buyers name there does that mean the LLC isn't mine anymore? I haven't worked with LLC's before but I know you have to pay for them so do you get a new one for each house you wholesale?

Thanks,
John

I can only answer your first question on how I do it since I haven't done a deal using an LLC. Basically you have 3 days to open escrow or bring in the EMD after your offer has been accepted. What I do, is I call my buyers before and tell them about the 10% EMD and make sure they are ok with putting in the money.

Well John...earnest money is the necessary evil to actually make a contract legal. It only takes a dollar to do so and that works for FSBO's by the way, but banks won't do that.

If you can't get your hands on the money you can do bird-dogging which costs you nothing. That way you can work on cash while sending deals to your buyers. So I have attached some basic information for you.

Definition of 'Earnest Money'

A deposit made to a seller showing the buyer's good faith in a transaction. Often used in real estate transactions, earnest money allows the buyer additional time when seeking financing. Earnest money is typically held jointly by the seller and buyer in a trust or escrow account.

An earnest money deposit shows the seller that a buyer is serious about purchasing a property. When the transaction is finalized, the funds are put toward the buyer's down payment. If the deal falls through, the buyer may not be able to reclaim the deposit. Typically, if the seller terminates the deal, the earnest money will be returned to the buyer. When the buyer is responsible for retracting the offer, the seller will usually be awarded the money. investo/rbailiff

Protect your earnest money with a good contract

The terms of the contract decide where earnest money lands if the contract is broken. Let’s say that a buyer’s contract has made the final purchase contingent on the results of an inspection. If the inspection reveals problems that are unacceptable to the buyer, the buyer can walk away from the home with his earnest money in tow. If the buyer backs out just due to a change of heart, the earnest money will be transferred to the seller.

A good contract with proper contingencies is essential in protecting your earnest money deposit. Make sure to work with a reputable, experienced real estate agent when crafting your offer.
How earnest money is used

Earnest money is paid by check at the time of your offer. Each state has very strict rules on how this deposit is managed until the transaction closes. Generally, these funds are held in an escrow account managed by the buyer’s real estate agent. The deposit is then applied to the sale of the property at closing.

Earnest money funds are usually applied to a loan’s closing costs or to the down payment. Since VA loans don’t require a down payment and closing costs are normally paid by the seller, many VA loan recipients end up getting their earnest money back.Jhall

Thank you for that info Randy!

John,

some investors (buyers) actually prefer to buy the properties with the LLCs; so, to answer your question, yes, the LLC does not belong to you once you sell the property with it. (you can register the LLC after your offer gets accepted; just name the LLC the house #/street name, ie. 123 Riverview Drive, LLC). You simply make an amendment to the articles of organization and the operating agreement of the llc to remove your name from it and add your buyer's name. You can 'reserve' the name for the llc without having to pay anything when you first submit your offer. Don't forget to include the cost of this to your fee once you register it so it doesn't come out of your profit...

Thank You Valerie. That is very helpful information.

And by the way Randy I have experienced a lot of what you talked about with earnest money and REO's with agents and almost lost some earnest money while making an offer on a property. I was lucky to get it back. I have learned a lot since then but now I have less money than I had back then but am finding I need to go back to the MLS because finding deals on my own doesn't seem to be working. I even had other bird dogs working for me.