Earnest Money For Commercial Property: What You Can Expect To Pay?

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 works in real estate so that CRE investors can be better prepared when approaching CRE sellers. 

What Are The Variation In The Earnest Money Amount?

On the one hand, knowing how earnest money works in real estate requirements is closer to the minimum (0.5% of the 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 will draw from a comprehensive study (accompanying a well-designed infographic) published by Duckfund. 

It is a company providing earnest money funding to investors. (CRE buyers interested in the average figures for some other states can read the report.) 

What Are The Variation In Terms Of Payment?

While most CRE sellers will require a one-time payment, some are now embracing multiple instalments. 

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. 

What Are The 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 checks, certified checks, personal checks, 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. 

Protecting Your Earnest Money Deposit

An earnest money deposit (EMD) is a sign of good faith when buying a property. It shows the seller that you are serious about completing the purchase. 

However, once the money is submitted, protecting it becomes essential. A small oversight in the contract or process can put your deposit at risk. 

The following steps help ensure your earnest money stays safe throughout the transaction. 

1. Make Sure Contigencies For Financing And Inspections Are Included In The Contract

Contingencies are your primary safeguard when placing an earnest money deposit. These clauses allow you to exit the deal without losing your deposit if certain conditions are not met. 

• Financing contingency protects you if your loan is not approved despite making a genuine effort. 
• Inspection contingency allows you to renegotiate or withdraw if serious issues are found during the property inspection. 
• Additional contingencies, such as appraisal or title review, may also be helpful depending on the transaction. 

2. Ensure Contract Terms Are In Writing 

Verbal assurances are not legally enforceable in real estate transactions. Every promise, deadline, condition, and exception must be documented in the contract. 

• Confirm refund conditions for the earnest money are clearly stated
• Ensure timelines for inspections, financing approval, and contingencies are specified
• Make sure any negotiation changes are added as written amendments 

3. Read, Understand, And Abide By The Terms Of The Contract

One of the most common reasons buyers lose their earnest money is missing deadlines or violating contract terms. 

• Review all timelines carefully, including contingency removal dates 
• Understand what actions are required from you and when 
• Ask questions or seek professional advice if any clause is unclear 

4. Utilize An Escrow Account To Hold Funds

Your earnest money should always be held by a neutral third party, such as an escrow company, title company, or real estate brokerage. 

• Never hand the deposit directly to the seller 
• Ensure the escrow holder is clearly named in the contract 
• Verify that the account complies with local regulations 

5. Make Sure The Deposit Is Handled Appropriately

Proper handling of the earnest money is just as important as placing it. 

• Obtain a receipt or confirmation once the deposit is submitted 
• Confirm the amount matches what is stating in the contract 
• Track where the funds hold and under what conditions they can release 

Paying Earnest Money And Closing Deals 

Since earnest money is now popular, CRE investors are under greater pressure to ensure they have this extra liquidity before they can pursue an 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 how earnest money works in real estate 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.