Are Earnest Money Deposits Refundable? Everything CRE Developers Need to Know
Sign Now, Pay Later with Fast Soft Deposit Financing
Discover how Duckfund can help you secure prime commercial real estate quickly, close multiple deals at once, and rapidly grow your CRE portfolio. Only pay the soft deposit when you are ready to close the deal. Apply for fast CRE funding now. We'll get back to you within 24 hours.
As commercial real estate developers drift into a restless sleep, they can almost hear sellers whispering in their ears, "Are you truly serious about buying?"
Picture this: you've found the perfect commercial property, planned every detail, and are ready to seal the deal. But wait. Providing earnest money can strain your resources and limit liquidity. So, you have wondered, are earnest money deposits refundable? And are there any alternatives for CRE financing?
To begin with, let’s identify the top points commercial real estate (CRE) developers often face, which vary depending on the specific circumstances and market conditions:
- Paying earnest money requires upfront capital, which can strain the liquidity of CRE developers.
- If a deal falls through, there is a risk of losing the earnest money deposit.
- Financing contingencies are often included in purchase agreements to protect sellers, requiring developers to put up additional earnest money.
- Negotiating the amount of earnest money can be a sensitive issue between buyers and sellers.
- Different jurisdictions may have specific regulations and requirements concerning earnest money deposits.
CRE developers should work closely with their legal and financial advisors to develop strategies that minimize risks and optimize their financing approach; however, to provide a better understanding of the possible solutions, this article will cover the following:
- Common forms of commercial real estate financing
- Are earnest money deposits refundable? (And other challenges)
- Strategies to overcome earnest money challenges
- Soft deposit financing to overcome liquidity shortages for earnest money
[Starting a new CRE investment and need to find reliable funding quickly? Duckfund provides CRE developers loans in less than 24 hours, and with lower interest rates and higher approval rates than traditional loans.]
1. Common forms of commercial real estate financing
Funds are the cornerstone for developing a successful investment in commercial real estate. Here are several commonly utilized options for financing commercial real estate:
Bank loans
Traditional or bank loans are the most commonly used tool for financing commercial real estate properties. They usually offer lower rates than other types of loans and are highly customizable.
Bank loans are long-term loans, usually extended to 20 years, allowing developers to pay off the loan while keeping some liquid assets for future developments. However, qualifying for such loans can be difficult as they require a down payment, income verification, and a high credit score. Additionally, the approval process can take a long time.
Crowdfunding
Crowdfunding has emerged as a relatively new and increasingly popular option for financing commercial real estate. Through online crowdfunding platforms, CRE developers have flexibility in connecting with potential investors. It allows small capital investors to invest in projects historically reserved for the ultra-wealthy.
CMBS loans
CMBS loans, "Commercial Mortgage-Backed Securities," are also a common way to finance commercial real estate deals. These loans are structured through a financial firm, usually a bank that pools multiple commercial mortgage loans and sells them as bonds to investors.
The CMBS loans grant the developers access to significant capital, longer loan terms, fixed interest rates, and non-recourse liability for borrowers. And it is a favorable choice for investors due to the diversified investment opportunity and the ability to choose different return plans.
SBA loans
The United States Small Business Administration(SBA) loans are government-backed loans designed to finance small businesses in the United States. The two common types of SBA loans are SBA 504 Loans and SBA 7(a) loans with funding up to $5 million. However, the main difference is in the repayment as 7(a) is a short-term loan ranging from 7 to 25 years, while the 504 loans range from 10 to 25 years.
Hard money loans
Hard money loans are a fast financing solution that might be processed and secured in one day. They are short-term loans with fewer eligibility requirements and high-interest rates. Like traditional loans, the loans are evaluated based on the commercial property value, not the developers' credit history.
Online lending platforms
Online fintech platforms are a rising trend in the commercial property market for quick and easy financing. Such platforms streamline the eligibility process for loans by ignoring some financial requirements, such as credit scores and years of business experience. Additionally, these loans are available around the clock, and the lending process sometimes takes less than 24 hours.
2. Are earnest money deposits refundable? (And other challenges)
After identifying the right commercial real estate property and finalizing all the necessary arrangements, the next step is to proceed with closing the deal. This is when earnest money, referred to as a "good faith deposit" or "soft deposit," comes into play.
Unlike down payments, the earnest money is typically refundable.
According to Paul Kim, an associate editor at Personal Finance Insider, “Earnest money can be refunded to you under certain circumstances and if it's built into your contract.”
A third party normally holds the earnest money in an escrow account until the deal is completed. If the sale is successful, the earnest money is applied to the purchase price or used to cover closing costs. However, suppose the transaction fails due to certain circumstances in the agreement, such as a failed inspection, inability to acquire finance, or seller breach of contract.
In that case, the earnest deposit may be refunded to the buyer. The specifics of refundability should be clearly stated in the agreement or contract. So it is critical to thoroughly review those terms before signing into any arrangement and to seek legal counsel if necessary.
Additionally, earnest money deposits may raise additional challenges, such as:
- Appropriate amount: It can be difficult to determine the proper amount of earnest money.
- Disputes and cancellations: Buyers and sellers may disagree on releasing or forfeiting earnest money if a transaction is canceled.
- Legal and contractual obligations: Both parties' legal and contractual obligations must be carefully considered when resolving disputes involving earnest money.
- Reviewing terms and conditions: Understanding the terms for refundability and any obstacles requires carefully reading the agreement.
For many developers looking to expand their investments, having additional liquid funds readily available in the form of earnest money can be burdensome for the following reasons:
Initial capital requirements
Similar to other payments involved in purchasing commercial real estate, such as due diligence fees, earnest money deposits are a percentage of the property's total price. Developers may find it challenging to allocate these funds to demonstrate their seriousness to sellers, especially when they may require the money for other essential processes like construction.
Opportunity costs
The earnest money deposits are usually held by a third party in an escrow account, and they will become temporarily unavailable to use by the developer. Such capital will tie the developers from investing in other opportunities to generate revenue or be used as working capital.
Limited cash flow
Earnest money limits the cash flow usually generated from existing properties or projects, restricting the developers' ability to fund ongoing operations, pay bills, or cover project expenses.
Risk of forfeiture
Despite being a refundable deposit, earnest money could be lost as a forfeiture if the developer failed to fulfill certain conditions in the purchase and sale agreement. Such loss can impact the cash flow and negatively impact the developer's ability to secure financing for future projects, as lenders might consider it a red flag.
“When earnest money is non-refundable from the beginning of a purchase contract, that effectively makes the offer non-contingent.” Said Gregg Davis, a Director at High Ground CRE, a KW Commercial affiliate.
Impact on the debt-to-equity ratio
One of the most important factors for a commercial real estate loan is the debt-to-equity ratio, which is the ratio of Total Debt to Total Equity, and a higher ratio indicates a higher risk investment for lenders. In this context, earnest money doesn't directly impact the debt-to-equity ratio but might have an indirect impact.
When the developers use all their funds to set earnest money deposits, they will need to rely on debt financing to complete the purchase, increasing the debt and the debt-to-equity ratio.
For example, if the developer plans to purchase a $5 million property, The developer may pay 10% as earnest money, which is $500,000. If the available cash is $600,000, then only $100,000 is left available to contribute to the equity, raising the debt-to-equity ratio.
3. Strategies to overcome earnest money challenges
Some strategies can help developers mitigate the earnest money impact and overcome financing challenges:
Plan and budget
Developers need to manage and forecast their timeline and cash flow to ensure they have enough funds to cover earnest money deposits. This involves setting aside some of their available capital specifically for earnest money.
Negotiate lower deposit amounts
Negotiation is the oldest trick in the book that can help reduce the earnest money deposit. Developers can support their negotiation by doing the following:
- Showing a track record of successful investments
- Having a good reputation
- Expanding personal networks
- Conducting market research to gather information about comparable properties and recent transactions in the area
- Providing alternative security proof, such as standby letters of credit
Earnest money financing
Securing a large loan for commercial real estate can be challenging due to strict qualifications. However, some financial firms offer smaller financing options to address the upfront cash requirement for earnest money deposits.
For instance, Duckfund provides soft deposit financing online, which enables developers to access the funds needed to secure a property while keeping their available capital intact for other project expenses.
4. Soft deposit financing to overcome liquidity shortages for earnest money
Soft deposit financing platforms are a new method that allows commercial real estate developers to access quick financing solutions simply and easily, regardless of their credit reports or scores.
In this process, they apply for financing from a specialized company. Upon approval, the financing company establishes a limited liability company (LLC) and creates a call option agreement with the borrower.
The LLC, acting on behalf of the borrower, signs the commercial real estate purchase and sale agreement and transfers the soft deposit to an escrow account. If the borrower proceeds with the deal, they will wire the soft deposit back to the financing company, resulting in the financing company obtaining a 100% stake in the LLC and taking control of the purchase and sale agreement.
However, if the buyer decides not to proceed with the real estate transaction, the financing company will cancel the purchase and sale agreement and retrieve the deposit amount from the escrow account. This financing mechanism provides flexibility to investors, enabling them to secure a property without tying up their own funds while allowing them to proceed or withdraw from the deal based on their assessment.
Duckfund specializes in providing soft deposit financing for real estate investors. The platform offers a smooth and fast application process that takes just two minutes. And applicants will be approved within 24 hours (no credit reports required), and then funds will be released within 48 hours.
Also, Duckfund charges a 2% monthly interest rate, one of the lowest in the industry compared to many lenders, which typically charge a percentage of the purchase price. With Duckfund, CRE developers can work on multiple commercial real estate deals simultaneously, even when you don’t have the liquidity on hand.
[Need financing for your next CRE investment? Duckfund offers affordable and fast financing with higher approval, lower interest rates, and easy applications.]
Takeaways
- CRE developers need liquid cash to keep up with the evolving CRE market
- Banks, crowdfunding, hard money loans, SBA loans, and online lenders are the most common financing options
- Purchase deposits, especially earnest money, pose financial challenges such as a lack of cash and lost investing opportunities
- One technique to overcome financial obstacles is effective budgeting, negotiation, and soft deposits
- Duckfund provides easy-to-obtain soft deposits for 2% interest and a processing time of less than 24 hours
CRE Classified: 7 Most Investable CRE Asset Classes Ranked By Performance in 2024
Want to see great returns on your commercial investments? Maximize your portfolio with 2024’s top 8 CRE asset classes.
Multifamily Market Trends 2024-2025: A Snapshot of Key Metrics
Look ahead to the multifamily market in 2025 with Duckfund’s in-depth analysis of current market conditions.
Hottest CRE Markets Forecasted: 7 US Cities to Watch in 2025
The difference between cities like Newark and Nashville is their CRE markets and whether you should invest in them or not.
Multi-Family Commercial Real Estate: Everything You Need to Know
All successful multifamily deals come from deep industry knowledge: this is the place to start.
The Truth Behind 7 Commercial Real Estate Myths
Dealing with facts rather than falsehoods is essential for any commercial property purchase.
How to Get Into Commercial Real Estate Development: 7 Tips to Turn Pro
For all developers and investors who want to make serious money, here’s how to get into commercial real estate successfully.
Sign Now, Pay Later with Fast Soft Deposit Financing
Discover how Duckfund can help you secure prime commercial real estate quickly, close multiple deals at once, and rapidly grow your CRE portfolio. Only pay the soft deposit when you are ready to close the deal. Apply for fast CRE funding now. We'll get back to you within 24 hours.
How to Find Vacant Properties and Outsmart the Competition
Here’s how to find vacant properties before they go to market and the bidding wars start.
Single Tenant vs Multi Tenant: Pros and Cons for Commercial Real Estate
Whether you should buy single-tenant or multi-tenant commercial properties depends on your risk tolerance and investment strategy.
How Big Data in Commercial Real Estate Is Changing The Way Developers Profit
All big property companies are going digital. The key is knowing how they’re doing it.
Commercial Property Development Finance: 6 Ways To Secure The Right Capital
These financing options will help you carry out the commercial venture you’ve always dreamed of.
ESG, PropTech…And Bamboo. What’s Driving Commercial Real Estate Sustainability Right Now?
Knowing the latest green trends will help you make your next project a more successful one.
Top Commercial Property Operating Expenses and How to Reduce Them
With decelerating rents across multiple CRE sectors, reducing operating expenses is the most appropriate way to increase net operating income and cap rate.
Sign Now, Pay Later with Fast Soft Deposit Financing
Discover how Duckfund can help you secure prime commercial real estate quickly, close multiple deals at once, and rapidly grow your CRE portfolio. Only pay the soft deposit when you are ready to close the deal. Apply for fast CRE funding now. We'll get back to you within 24 hours.
Upzoning, Downzoning, and Everything In Between: A CRE Investor’s Guide to Commercial Property Zones
Getting your head around zoning laws will help you make a success of your CRE investment.
How To Find The Value Of Commercial Property: A Guide For Property Developers
To be a successful developer, you must find the right place for properties you buy and charge the right price for the ones you sell.
Don't Get The Wrong Loan: Your Guide to Mastering CRE Financing
Any CRE investor worth their salt must know which financing works best for them.
Funding Mastered: How to Find the Right Commercial Building Financing for Your CRE Investment
Growing your property portfolio is possible, but you’ll need to make some key calculations.
Unlocking Opportunities: How to Raise Capital in a Tight Lending Market
Some investors see doom and gloom but there are big opportunities in the commercial real estate market for those who can focus on the positives.
How Much Does it Cost to Build a Warehouse: A CRE Investor’s Guide
Funding warehouse construction is tough, so you’ll need a detailed building plan to follow.
Sign Now, Pay Later with Fast Soft Deposit Financing
Discover how Duckfund can help you secure prime commercial real estate quickly, close multiple deals at once, and rapidly grow your CRE portfolio. Only pay the soft deposit when you are ready to close the deal. Apply for fast CRE funding now. We'll get back to you within 24 hours.
Should You Dive into Self-Storage Financing? Unpacking the Potential for CRE Investors
Making money from self-storage is a hot topic in the CRE market, but you’ll need to know how to finance it.
3 Commercial Real Estate Challenges You Can Also Profit From
Here’s how to outsmart the biggest challenges the CRE market throws at you.
Powering the Cloud: Your Guide to Data Center Financing
So you are looking to invest in data centers, but how much will it cost?
12 Real Estate Investing Tax Strategies You Should Know
These guidelines will help you get the most out of your CRE income.
Is Earnest Money Refundable? Here’s What The Experts Say
Locking tens of thousands of dollars in escrow is not a gamble if you understand when and how earnest money is refundable.
Faster Earnest Money Deposits: The Secret Weapon in Winning CRE Deals
Earnest money deposits have become so important that CRE investors looking to build successful portfolios cannot ignore them.
Sign Now, Pay Later with Fast Soft Deposit Financing
Discover how Duckfund can help you secure prime commercial real estate quickly, close multiple deals at once, and rapidly grow your CRE portfolio. Only pay the soft deposit when you are ready to close the deal. Apply for fast CRE funding now. We'll get back to you within 24 hours.
Get Your Properties in Order: 4 Expert CRE Investment Strategies To Help In A Tough Market
We’re going through a tough CRE market, but knowing how to invest wisely will get us through it.
7 Real Estate Law Firm Marketing Ideas Every Attorney Should Use
The property law market is crowded, but you can still stand out from the crowd
The Ultimate Guide to Good Faith Deposits in the Big Apple
From the paperwork to the payment, dive into the protocols and practices surrounding good faith deposits in NYC’s commercial real estate transactions.
Good Faith Deposits in Commercial Real Estate: A Complete Guide
Almost every CRE deal now requires a good faith deposit, so CRE investors must understand what good faith deposits are about and how to get them for every deal.
6 Mortgage Broker Marketing Ideas You May Not Have Thought Of
If you haven’t explored these mortgage broker marketing ideas, then now’s a good time to try.
How Option Fees & Earnest Money Work in Real Estate Deals
Make the right choice about financing real estate and master the differences between option fees, earnest money, and call options.
Sign Now, Pay Later with Fast Soft Deposit Financing
Discover how Duckfund can help you secure prime commercial real estate quickly, close multiple deals at once, and rapidly grow your CRE portfolio. Only pay the soft deposit when you are ready to close the deal. Apply for fast CRE funding now. We'll get back to you within 24 hours.
Is Gator Lending Legit? Bringing Clarity to an Important Debate
Gator lending, a form of creative financing, is becoming popular. But is it legitimate or should property investors beware?
How Much Are Earnest Money Deposits in Michigan? The Definitive Guide
The right understanding of earnest money deposits in Michigan will aid prospective buyers, investors, and property flippers in confidently cinching commercial real estate deals in The Great Lakes State.
What is Gator Lending: A Simple Guide to Creative Financing in Real Estate
Gator lending is providing an alternative for real estate investors who are fed up with traditional lending becoming more inaccessible and stressful.
6 Proven Title Company Marketing Ideas to Unlock More Sales
Wondering how to get your title company’s name in front of new customers? Look no further.
Commercial Real Estate Analysis: How to Find and Select the Right Properties
Get commercial real estate analysis right, and you’ll be able to select profitable properties and avoid loss-making ones.
Commercial Real Estate Market Analysis 2024: 5 Factors Set to Move The Market
2024 will be a make-or-break year for CRE property developers. Get ahead of the market by leveraging the 5 factors laid out in this commercial real estate market analysis.
Sign Now, Pay Later with Fast Soft Deposit Financing
Discover how Duckfund can help you secure prime commercial real estate quickly, close multiple deals at once, and rapidly grow your CRE portfolio. Only pay the soft deposit when you are ready to close the deal. Apply for fast CRE funding now. We'll get back to you within 24 hours.
Earnest Money Deposits in Tennessee: What You Need to Know Before Making an Offer
Nashville is one of the nation’s top 5 commercial real estate markets, making investments in Tennessee worthy of further research.
A Deep Dive into Earnest Money Deposits in Arizona: All You Need to Know
Understanding how earnest money deposits in Arizona work will assist you in securing a successful CRE sale in Phoenix, the US’ second hottest market to watch for 2024.
Lawsuits, Rights Losses, and Bad Publicity: Here’s What Happens if You Don’t Make An Earnest Money Payment
Not paying earnest money isn’t the end of the world, but here’s what might happen instead.
Sign Now, Pay Later: Close CRE Deals Faster with Duckfund
Thought securing a property with no money down was impossible? Think again.
Should You Buy Office Property With An LLC? All You Need to Know
CRE investors might be struggling to secure office space right now. But then they might not know about this creative soft deposit solution.
Why Releasing Earnest Money Prior to Closing Isn’t as Hard As It Looks
Putting down earnest money can be difficult and you’re not guaranteed to get it back. Knowing how to release it is vitally important.
Sign Now, Pay Later with Fast Soft Deposit Financing
Discover how Duckfund can help you secure prime commercial real estate quickly, close multiple deals at once, and rapidly grow your CRE portfolio. Only pay the soft deposit when you are ready to close the deal. Apply for fast CRE funding now. We'll get back to you within 24 hours.
Strategies for Success: How to Flip Commercial Real Estate Contracts for Profit
Flipping commercial real estate contracts is a low-cost and low-risk investment strategy that any real estate investor can explore.
How to Safely Pay Earnest Money Online Using an LLC
Problems with earnest money payments can ruin a property deal. But they can be avoided if you use this method.
How to Flip Commercial Real Estate Like A Pro
Flipping commercial real estate has its risks, but with a good grasp of the fundamentals you can generate high returns while minimizing risk.
How Much Is Earnest Money for Commercial Property in the US: A Complete Guide
Understanding earnest money is crucial to closing commercial real estate deals in many US states.
Ignore Your Bank: Buying Commercial Property With No Money Down is Possible
Illiquidity can be a limiting factor for commercial real estate investors in today’s market. But with the right strategies, even illiquid investors can thrive.
How Much is Earnest Money in Texas: A Guide to Take Your Real Estate Game to the Next Level
How much is earnest money in Texas, and why, how, and when should it be paid? In this guide, we take you through the finer details of earnest money deposits in the USA's hottest real estate market.
Sign Now, Pay Later with Fast Soft Deposit Financing
Discover how Duckfund can help you secure prime commercial real estate quickly, close multiple deals at once, and rapidly grow your CRE portfolio. Only pay the soft deposit when you are ready to close the deal. Apply for fast CRE funding now. We'll get back to you within 24 hours.
How to Finance a Commercial Property Without Worrying About Liquidity
Learn how to finance a commercial property via the diverse funding options available in 2023. Besides traditional banking loans, online platforms now offer great financing quickly and cost-effectively.
How Much is Commercial Land Worth: 4 Methods for CRE Valuation
Knowing what a piece of commercial land is worth will help you avoid overpaying for it. Here is your complete guide to understanding how to conduct commercial land valuation.
How Much Earnest Money Is Required in Georgia? (And Other FAQs, Explained)
Understanding how much earnest money is required in Georgia, when and how to pay, and who holds the earnest money are all vital to closing a successful property sale in one of the US’ top markets.
How Much Earnest Money Is Required in Illinois: A Comprehensive Guide
Boost your investment portfolio by investing in Chicago, Illinois, one of the US’ top gateway markets.
Finding Your Way in Florida Real Estate: A Complete Guide to How Much Earnest Money Is Required in Florida
Understanding how much earnest money is required in Florida is key to securing property in one of the top housing and commercial real estate markets in the United States.
Flip the Game: 8 Tips for Commercial Real Estate Flipping
Having capital always helps in a competitive CRE market, but sometimes getting smart leads can lead to the biggest flip gains.
Sign Now, Pay Later with Fast Soft Deposit Financing
Discover how Duckfund can help you secure prime commercial real estate quickly, close multiple deals at once, and rapidly grow your CRE portfolio. Only pay the soft deposit when you are ready to close the deal. Apply for fast CRE funding now. We'll get back to you within 24 hours.
Earnest Money Deposits vs Down Payments: How They Differ and Why You Should Care
Earnest money deposits and down payments are both important parts of closing real estate deals, but there are significant differences that investors must be aware of.
How Does Earnest Money Work in Commercial Real Estate?
As earnest money becomes more common in commercial real estate, investors must understand what it is all about and how to secure these funds quickly when they need them.
Earnest Money in Colorado: Seal the Deal Before Anyone Else Does
Understanding the process of paying earnest money in Colorado can spell the difference between closing and losing a deal.
A Winning Investment: Learn The Difference Between Due Diligence Fees and Earnest Money
Both can make or break your property deal, so understanding these two key terms (and how they differ) is crucial.
Future-Proof Your CRE Portfolio: 10 Essential Trends Developers Should Watch (2024)
The CRE market is unpredictable but developers who stay informed will ride its waves.
Lacking Cash? 4 Ways To Raise a Soft Deposit for Commercial Property
Current economic conditions make raising a soft deposit seem tough, but not if you know where to look.
Sign Now, Pay Later with Fast Soft Deposit Financing
Discover how Duckfund can help you secure prime commercial real estate quickly, close multiple deals at once, and rapidly grow your CRE portfolio. Only pay the soft deposit when you are ready to close the deal. Apply for fast CRE funding now. We'll get back to you within 24 hours.
Explaining Due Diligence and Earnest Money in South Carolina
Understanding the uses and distinctions between due diligence and earnest money in South Carolina is crucial to successfully navigate today's competitive market and seal valuable CRE deals.
5 Commercial Real Estate Tech Trends You Can't Afford to Ignore (But Most Investors Do)
Digital transformation is changing the world. The CRE market is no different.
Ahead of the Curve: 7 Commercial Real Estate Trends Set to Shake Up 2024
The past year’s bumpy ride in CRE is far from over, but a new investment landscape emerges for the careful investor. You can thrive amid the chaos by capitalizing on 2024’s top commercial real estate trends.
Commercial Land Development: 8 Steps to Build Commercial Properties From Scratch
Commercial land development is a profitable enterprise for those who are willing to follow the process. Below is a step by step guide to doing it right.
Sign Now, Pay Later with Fast Soft Deposit Financing
Discover how Duckfund can help you secure prime commercial real estate quickly, close multiple deals at once, and rapidly grow your CRE portfolio. Only pay the soft deposit when you are ready to close the deal. Apply for fast CRE funding now. We'll get back to you within 24 hours.