How Does Earnest Money Work in Commercial Real Estate?
Earnest money is a deposit made to the seller of a commercial property in order to demonstrate the buyer’s intention to purchase the property. Putting down earnest money gives a buyer additional time to finish the approval process for their loan, order a property appraisal, and have property inspections and other third-party reports completed before purchasing the property.
How Much Earnest Money is Needed?
Earnest money is not always needed in a commercial real estate property transaction, but in general, it’s typically around 1% of the purchase price. However, it’s completely up to the seller as to how much earnest money they want a borrower to put down. For desirable properties in hot markets, sellers may ask for 5%, 10%, or even a 15% earnest money deposit to reserve a property.
Is Earnest Money Refundable?
Whether earnest money is refundable depends on the specific contract that a buyer has with the seller. In many cases, a potential buyer’s earnest money is not refundable, even if they cannot get financing to purchase the property in question. However, in other cases, it may be fully refundable if the buyer cannot get financing. Earnest money is almost always refundable, however, if the seller decides to pull out of the deal.
What Happens to Earnest Money?
If a commercial real estate deal successfully goes through, in the vast majority of cases, the earnest money will be credited toward the purchase price of the property. As mentioned previously, however, if they buyer pulls out of the deal, the money will often stay with the seller, whereas if the seller pulls out, the money will usually be refunded to the buyer.