1. Wholesale contract flips, where the buyer temporarily controls the house by putting it under contract with the owner and tries to assign it to another buyer during the contingency period within escrow. The next assigned buyer brings the cash to the table to buy out the wholesale flipper. Money problem resolved.
2. Rehabber buys the property and uses hard money sources as well as gap/bridge money to buy the house long enough to fix it up and sell it, usually several months total time to buy, rehab, the put it on the market and sell it, hopefully for a profit. Money problem resolved.
3. Buy and hold. These are future landlords looking to buy a house, then rent it out. Most try to use some form of conventional financing. Again, money problem resolved.
So, here is a rundown on the different things we think you should know about how EMD funding works for our clients.
1. Risk free as we can make it. We do not charge any upfront fees for processing, etc. If the escrow falls through, you owe us nothing. (We just get our EMD funds back and hope to make money together on a future deal.)
Our markups usually amount to a small percentage of the EMD requester's overall profit; you keep the vast majority of your hard-earned profits in your pocket.
2. Our earnest money deposit (EMD) funds can never be allowed to go hard (nonrefundable) during escrow; they must stay soft the entire time. After all, the “D” in EMD stands for DEPOSIT; those funds are not a down payment.
However, some sellers, realtors and investors mix up the two. The job of the EMD fund requester (the buyer) is to bring in exit strategy monies (purchase price, down payment, rehab, etc.), by close of escrow, thereby removing any monetary incentive for the seller to want to try to keep/hold onto the EMD monies.
Here is why it is so important that EMD funds stay soft until escrow closes: Should escrow fall through for any reason (buyer’s fault, seller’s fault, nobody’s fault), and the EMD has already gone hard, some sellers are tempted to try to keep the earnest money deposit monies as their own.
We could lose the EMD funds we put up for you; that is a not a risk we are willing to take. Thus it is vitally important that all offers made to sellers must include this fact. Doing so during the offering stage just makes it a normal part of the buying process, thus hopefully preventing it from becoming a problem later.
To help prevent this from becoming a problem, please insert the following verbiage into all offers for which our EMD funding is to be used to facilitate a deal:
Should the escrow fail to close for any reason whatsoever, regardless of which party cancels the escrow, or of the status of any contingency, or of the results of any inspection, or of the time elapsed between date of acceptance and the scheduled closing date or date of cancellation, the earnest money deposit shall be refunded in full to the Buyer, by issuance of a check from the escrow company (or equivalent entity) to the account from which the deposit was received.
3. 1% EMD is the norm (say $5,000 on a $5,000,000 purchase price). Yet some sellers demand 2%, 5%, 10% or more. NOTE: Anything above 1%, may mean you have to pay higher markups.