Earnest Money in Commercial Real Estate
Earnest money is a deposit made by a buyer to demonstrate their serious intent to purchase a commercial property. This money is usually held in escrow until the transaction is complete.
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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. This amount is generally held in escrow until the deal is complete.
Putting down earnest money gives a buyer additional time to finish the approval process for a loan, order a property appraisal, and have property inspections and other third-party reports completed before closing on an acquisition.
How Much Earnest Money Is Needed?
When considering how much earnest money for commercial property is needed, it's usually set as a percent of the property's purchase price — between 1% and 3% in most cases.
That said, there is no hard rule, as the amount required is completely up to the seller. For desirable assets in hot markets, a seller may ask for 5%, 10%, or even a 15% earnest money deposit to reserve a property.
Is Earnest Money Refundable?
It depends on the contract the buyer has with the seller. Often it is not refundable if the buyer is unable to complete the transaction — even if it's simply because the buyer failed to get the necessary financing. Some sellers and contracts may allow a refund if the financing doesn't come through.
If the seller pulls out of the agreement, however, earnest money is nearly always refundable.
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.
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Related Questions
What is earnest money 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.
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.
How is earnest money used in commercial real estate transactions?
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. If the 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.
SourceWhat are the risks associated with earnest money in commercial real estate?
The main risk associated with earnest money in commercial real estate is that the buyer may not be able to complete the purchase of the property. If the 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. Additionally, if the buyer is unable to secure financing for the purchase, the earnest money may not be refunded.
It is important to note that earnest money is not a substitute for a loan. It is simply a deposit that demonstrates the buyer’s intention to purchase the property. The buyer will still need to secure financing for the purchase of the property.
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What are the benefits of earnest money in commercial real estate?
The benefits of earnest money in commercial real estate are that it demonstrates the buyer's intention to purchase the property, gives the 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. Additionally, if the commercial real estate deal successfully goes through, the earnest money will be credited toward the purchase price of the property.
What are the best practices for earnest money in commercial real estate?
The best practices for earnest money in commercial real estate are to put down a deposit that demonstrates your intention to purchase the property. Generally, this is around 1% of the purchase price, but it can be higher depending on the seller's preference and the desirability of the property. It is important to note that earnest money is not always needed in a commercial real estate transaction.
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