As the use of earnest money in commercial real estate (CRE) increases, potential investors must know what they are expected to pay as earnest money for commercial property. This will help them make proper planning so they can close deals and not be left out by sellers.
CRE sellers in the US, including in hot markets like Tennessee, Texas, Georgia, Florida, and North Carolina, now require earnest money before they can negotiate with potential buyers or even show them the property.
However, the typical requirement for earnest money varies from one state to another. CRE sellers can expect to pay between a minimum of 0.5% and a maximum of 10% of the purchase price of the property as earnest money.
In what follows, we consider how earnest money requirements vary from state to state so that CRE investors can be better prepared when approaching CRE sellers.
Variation in the earnest money amount
On the one hand, are states where earnest money requirements are closer to the minimum (0.5% of purchase price).
For example, CRE buyers in Iowa can expect to pay between 0.5% and 1% of the purchase price. Those in Arizona, Oklahoma, North Carolina, South Carolina, and South Dakota can expect to pay an average of 1% of the purchase price. In Nevada, Ohio, Wisconsin, and Wyoming, the average is between 1% and 2% while it is between 1% and 3% in North Dakota, California, Connecticut, Georgia, Kansas, and Kentucky.
On the other hand are states where the requirement is closer to the maximum (10% of the purchase price). In Massachusetts, CRE buyers can expect to pay 5% of the purchase price. Also, those in Louisiana, Pennsylvania, and Florida can expect to pay between 5% and 10% while those in Michigan, New York, and Alaska will most likely pay the maximum.
In between these two are states like Hawaii, Colorado, and Idaho, where you can expect to pay anywhere between 1% and 5%.
These average figures have been pulled from a comprehensive study (accompanied by a well-designed infographic) published by Duckfund, a company providing earnest money funding to investors. (CRE buyers interested in the average figures for some other states can read the report.)
Variation in terms of payment
While most CRE sellers will require a one-time payment, some are now embracing multiple installments.
For example, in Rhode Island, sellers allow buyers to pay between 1-2% of the purchase price after contract signing and the remainder after the due diligence period. A similar structure is held in Illinois.
Another innovation is the requirement for a fixed amount instead of a percentage of the purchase price. This can range between $500 and $2,000 as it is in Nebraska, between $500 and $1,000 as it is in Maryland, or between $500 and $5,000 in South Dakota.
Variation in the mode of payment
While cash is still acceptable in places like Texas, sellers in Colorado won’t accept it. Payment methods for earnest money in the US vary, with cash, cashier’s check, certified check, personal check, and wire transfers being the most popular options.
Though payment methods vary, the usage of the amount paid is similar. The earnest money is deposited with a third party (escrow) who will hold on to it pending the conclusion of the deal.
Paying earnest money and closing deals
Since earnest money is now popular, CRE investors are more pressured to ensure they have this extra liquidity before they can actualize interest in any property.
To this end, companies like Duckfund have come up with earnest money funding services to provide money for CRE investors who are not liquid enough to make the payment.
Investors can apply for this financing in just two minutes and get the money within 48 hours. What’s more? Duckfund does not ask for credit reports and it can fund multiple deals at the same time.
Irrespective of the earnest money requirement in the state where you are investing, Duckfund will supply you with the funds you need at a very cost-effective financing rate so you can keep building a profitable portfolio of CRE.
