Wholesaling a House: Finding Cash for Earnest Money Deposits
Where can you find the cash for earnest money deposits when wholesaling a house, how much should you deposit and what can you do to protect what you put down?
The opportunities for flipping properties have likely never been greater in the U.S. and the ease of scaling from wholesaling a house occasionally to dozens in rapid succession has never been better. The only thing that appears to be holding some back is access to more earnest money deposit funds for getting more offers out there and contracts locked down.
So where can investors find more liquidity to scale their operations quickly, how much risk should they take in doing so and how can odds be improved and threats reduced?
How big should your deposit be?
One of the most common questions newer wholesalers have today is how big an earnest money deposit (EMD) they should be willing to put down. Real estate agents are getting greedy again and are demanding increasingly larger deposits or telling buyers that their outrageous demands are the norm for taking a property off the market.
There really isn’t a normal amount. You will want to put down something to seal the contract but the less you put down as an investor the better for liquidity and lowering risk of loss.
You can down as little as a few hundred dollars in EMD when wholesaling HUD homes, while some bank and Realtors might ask for 10% of the purchase price, especially if you are portraying yourself as a cash buyer.
If what is being asked for is too much look for different sources of properties or try to break it up into pieces or trade off lower deposits for faster closing times or fewer contingencies.
Where to find the money…
Even busy investors that are bringing in big incomes often find themselves tight on real cash right when they need it. So how can you finance your EMDs?
- Personal bank loans and lines of credit
- Borrowing from family and friends
- Peer-to-peer lending and crowdfunding websites
- Credit card cash advances
- Or using transactional funding that will put the money right back in your pocket with 100% financing
Is it worth financing your deposits?
Leverage is one of an investor’s best tools. However, when it comes to deposits wholesalers do have to acknowledge the real risk that is out there. Sellers and their agents will purposely pull stunts to try and keep your deposits and sometimes deals will just fall apart. If you have financed your EMD when attempting wholesaling a house that could mean you don’t recoup the money you thought was coming back ‘guaranteed’ and will need to be able to pay it back from another source. You might find this only happens in 1 out of 10 or even 1 out of 100 deals but factor it in as a cost of doing business.
Never making a deposit with anyone expect for your own attorney or title company can dramatically reduce this risk and make sure everyone is working in your favor, as can making sure you have enough contingencies to back you up in your contracts. If you ever run into an issue you could also attempt representing yourself in taking them to court instead of forking out for attorney fees too.
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