As the use of earnest money increases in the commercial real estate (CRE) industry, investors are finding it valuable to know how to pay earnest money online so they can close deals faster and build a winning portfolio.
Earnest money, also known as a soft deposit, is an amount sellers of real estate demand that buyers pay as a show of commitment before negotiation for the property can take place.
In this article, we will consider the use of earnest money in CRE, why it is becoming more mainstream, and then how investors can make the payment.
Earnest money in commercial real estate
Earnest money first became popular in the home buying or residential real estate industry. But in recent years, it has gained more popularity even in the CRE market.
Today, most CRE sellers will request between 1% to 15% of a property’s purchase price as earnest money before the deal can even proceed.
There are at least three reasons for this rise in the popularity of earnest money in CRE.
First, sellers have discovered that some potential buyers don’t have a real or genuine interest in the property. Tired of wasting time and money engaging with these types of buyers, they have resorted to earnest money as a show of seriousness and commitment.
Second, amidst rising demand (and competition) for CRE properties, earnest money is a quick way for sellers to trim down the number of potential buyers and focus only on the committed ones.
Third, by focusing only on serious and committed potential buyers, earnest money ensures fast closure of deals.
Paying earnest money
Since earnest money only confers a right and not an obligation to buy, the money does not go to the seller. Rather, it is held by an escrow where it stays until the seller and buyer strike an agreement.
There are various real estate escrow companies that oversee such transactions. Both buyer and seller must agree on an escrow they believe is trustworthy.
Once an escrow has been selected, the buyer can make an online transfer to the escrow or pay in cash (if preferred).
If the deal goes forward and succeeds (ie, there is an agreement), the escrow will release the funds and it will either be used to pay part (or all) of the closing costs of the deal or the downpayment for a mortgage.
On the other hand, if the deal fails, the money will be returned to the buyer provided the reasons for the failure is part of the contingencies initially agreed by both parties and/or is due to the seller’s decision.
Getting access to earnest money
Getting cash to pay for earnest money has been difficult for some buyers, especially in the CRE market where large sums of money are required.
Those who have resorted to bank loans have found the process cumbersome, the interest rate exorbitant, and the whole idea inefficient.
In response, companies like Duckfund have created a unique financing solution – earnest money (or soft deposit) financing specifically made for CRE deals.
Unlike banks, they don’t require a credit report or score and application can be successfully completed in just two minutes. Moreover, Duckfund provides the needed cash within just 48 hours. Their 2% monthly financing fee is also very cost effective compared to banks and online lending platforms.
Duckfund also structures the deal in a way that makes it easier for buyers to opt out of a CRE deal.
When the investor applies for funding, Duckfund creates an LLC and a call option agreement between itself and the borrower. This LLC then signs the purchase and sale agreement with the seller and sends the earnest money to an escrow. Moreover, all of these processes can be completed online.
If the deal succeeds, the investor will wire the soft deposit back to Duckfund and then it will take control of the LLC and the purchase and sale agreement. If the deal does not go through, Duckfund will annul the purchase and sale agreement and recover the earnest money from the escrow.
This process makes it easy for investors to enter many deals at the same time as they seek to create a profitable portfolio.
If you are a real estate investor seeking to invest in multiple CRE deals but can’t provide the required earnest money, Duck fund will provide you with the needed funds in the most efficient way.