As the US commercial real estate industry continues to become more competitive, the use of earnest money to close deals faster has soared.
Previously, commercial real estate investors didn’t need to worry about their liquidity until it was time to make downpayment for a mortgage and pay closing costs on the property.
Now, sometimes before they can even inspect a property and negotiate its price, sellers and their agents are asking to pay a soft deposit, also known as earnest money.
According to Investopedia and the National Association of Realtors, this can be between 1% and 5% of the property’s purchase price. Credible, a loan comparison website, puts it at 1%-3%, going up to 10% for new properties. In some areas, this can even extend to 15%.
Consequently, before commercial real estate investors can even go ahead with their interest in a property, they need to pay between 1%-15% of its purchase price as a signal of interest.
What’s behind this trend, and how can CRE investors still grow their portfolios without the burdens of high-interest loans?
Show of commitment
Sellers and their agents now increasingly request earnest money as a show of commitment on the part of potential buyers.
It’s not uncommon for investors with little to no interest in a property to still request inspection and negotiate prices. Sellers, therefore, request earnest money to avoid going through all the trouble when there is no genuine or significant interest.
They believe that someone that can part with between 1%-15% of the purchase price is genuinely interested and both inspection and negotiation can proceed.
Rising competition for commercial properties
The need to show commitment has also been exacerbated by the rising competition for commercial properties. As the market becomes more profitable, demand rises, and sellers have to develop a way to screen potential buyers.
Moreover, even buyers are now using earnest money to gain advantage over competitors. Even when the seller does not request it, some buyers propose it as a way to show commitment. And when sellers do request it, some buyers can propose a higher percentage to gain a competitive advantage.
The need to close deals faster
Sellers and buyers in today’s market want to close deals faster so they can move to new ones. This is due to rising demand on the one hand, and stagnant supply in some states on the other hand.
The payment of earnest money is one way parties are looking to close deals faster.
Why it matters
Commercial real estate investors can no longer wait until it’s time to close the deal to seek cash. Now, they have to ensure they are liquid at the very beginning of deals so they can avoid missing out on opportunities.
And this is important because cash has been hard to come by for many investors especially in the aftermath of COVID-19 and today’s enduring global inflation.
Some have turned to traditional bank loans but have been turned back by complex red tape. Others have turned to online lenders but have been discouraged by the high interest rate and arduous terms.
What then can real estate investors do?
Turning to soft deposit (or earnest money) financing is a solution.
Duckfund is a fintech company that provides this service. With earnest money financing, commercial real estate investors can apply for soft deposit within just two minutes (no credit report or credit score required) and get cash paid into an escrow account in just 48 hours.
Unlike other online lenders, Duckfund charges just a 2% monthly financing fee and they do not impose any burdensome terms on borrowers.
Moreover, Duckfund can provide multiple earnest money deposits so real estate investors can process with various deals at the same time. In this way, investors can build a portfolio of commercial real estate investments even without cash.
If you have been forced to back down on a property of choice because of requirements for earnest money, you can turn to Duckfund to avoid a repeat of that situation.