What is earnest money in wholesaling?
Earnest money is a deposit the buyer puts down to show good faith when signing a purchase agreement. In wholesaling it is usually modest, held by a title company or attorney, and credited toward the price at closing, or returned if you cancel within your inspection period.
The risk to a wholesaler is the deposit if they back out after the inspection period without a valid reason. That is why the inspection period and the amount deserve attention.
Amounts vary by market and contract. Say who holds the deposit and the conditions for refund in the agreement.
Common mistakes
- Paying the deposit directly to the seller.
- Missing the inspection deadline and losing the deposit.
- Ignoring a state minimum deposit for wholesale agreements.
More questions
How much earnest money is typical in wholesaling?
It varies by market and deal and is often small, but some states now set minimums for wholesale agreements. Louisiana, for example, requires an escrow deposit of at least 1% of the price for covered wholesale agreements.
Who holds the earnest money?
Usually the title company, escrow company or closing attorney named in the contract. Avoid paying it directly to the seller.
Does the end buyer pay earnest money too?
Often yes: the assignment agreement usually requires a deposit from the end buyer, which shows commitment and protects your fee.