You’ve heard that you should give only small earnest money deposits, but how do you handle the Seller’s objections?
My mentoring clients ask me this all of the time, so I tell them how I handle it with Sellers…
Before I get into that, let’s make sure you understand the “why” you want to do this. Having a signed Purchase & Sales Agreement (PSA) gives you control over that property during the contract period.
Earnest money is NOT required (as some mistakenly believe) to make the contract valid. It is simply to show that you are “earnest” and operating in good faith. In truth, earnest money could be zero.
Because my PSA also limits any liability to just the Earnest Money, it is required that there be some earnest money – but I like to keep that small – between $10-$100.
So then the question: Will Seller’s really accept that? How to get around their objection when they say that earnest money is always more?
The first thing to understand here is that we need to be dealing with a motivated seller – a seller who not only wants to sell, but needs to sell as well. So this typically will not work with listed properties and definitely will not work with bank owned properties.
When working directly with the seller, I simply review the Earnest Money paragraph with them and do not falter in my voice when it comes to the amount. And then I say something like: “So I will be making this check out to you today to hold until closing.”
If they question the amount, my first reply is:
“Actually, earnest money is not required at all for these contracts. Earnest money is something that Realtors ask for to make sure that the buyer is sincere, or earnest, in their offer. The reason is that there are so many loopholes to get out of the contract that they want to make sure the buyer is sincere. After all, if you look at a Realtors contract, they are 10-15 pages long filled with contingencies (or reasons) for the buyer not to buy the property.
You’ll notice that my paperwork is just 1-page long and it says one thing: I am going to buy your property. It doesn’t give me a bunch of ways out of the contract.”
That is usually sufficient for the seller to move on from the earnest money conversation. If not, then I say…
“I buy a lot of houses. If I were to offer large earnest money deposits on all of these houses, I could not buy as many houses. Obviously I am sincere, or earnest, about buying your house. That’s why I have no escape clauses. So do you want large earnest money or do you want me to buy your house?”
The only sensible answer at this point is they want me to buy their house. As soon as they say that I move on as if the discussion is over – and it is. They never go back.
Now sometimes, it makes sense to give large earnest money deposits – but you need to understand that they are at risk if you don’t close. My PSA is very powerful, but like I said there are no escape clauses. So if you are going to give a large earnest money deposit, be willing to lose that amount of money.
One of my mentoring Clients came to me with an issue this week. The Seller is very motivated, willing to sell at a great price, but needs $2,500 NOW. The only way to give that to her was through Earnest Money, but my Client didn’t want to risk that much cash.
Here’s how we drew up the offer. The $2500 earnest money would be held by my Client’s attorney and released to the Seller once these three conditions had been met:
- Title came back with no issues
- The Seller signed a Promissory Note and 2nd Mortgage on her property for the $2500, so that if later the Seller could not sell, his funds were still secured by the real estate.
- Seller signed a Quit Claim Deed to my Client which my Client could file if the Seller did not live up to the terms of the PSA.
Although there is still some risk, with these conditions met, my Client felt like he was reasonable protected and willing to offer the higher Earnest Money.
Moral of the story: Don’t get locked into just once strategy or technique. Assess the problem and come up with a work around. That’s what I do with my Clients so that they close more deals.
Now go out and make some offers and don’t be afraid of your earnest money conversations.
Expect abundance,
Lou Castillo
