Earnest money is not technically necessary for an enforceable real estate contract. Most buyers will require some amount of earnest money, but that is not true 100% of the time. You can find opportunities to buy property with no cash outlay until the day of closing.
If you promise to buy, and the seller promises to sell, that is enough for an enforceable contract. Many buyers mistakenly assume they can freely cancel a contract if they never wrote the earnest money check. Many sellers mistakenly believe they can change their mind if they simply do not cash the earnest money check. Neither of these things is true.
Earnest money shows that you have some financial resources and can afford to pay. It also has hostage value, so that you will think twice before changing your mind and forfeiting it. Although earnest money is not essential for an enforceable contract, it can in some circumstances indicate that a contract exists. For example, if several counteroffers go back and forth, the seller might not think to initial the last set. Technically, no contract exists until the seller formally accepts your last counteroffer. But, if the seller accepts and cashes your earnest money check, that can suffice to cure the technical defect.
If money is tight, you might want to omit any earnest money from your offer. Odds are, the seller will request something. That number might be less than you would have offered to start with. The amount of earnest money will vary greatly among deals. There is no set percentage or rule of thumb. If the seller has not had any offers that are even close to acceptable, it will take only a small amount of earnest money to convince him or her you are a serious buyer. Hot markets may require larger earnest money deposits. Just remember, as much as you think you know about that property, as perfect as you think it might be, something could happen to change your mind. You have to be willing to forfeit whatever amount you offer, in case it becomes necessary.
The courts will not enforce a seller-financing agreement if the parties have not specified enough terms in advance for the court to create a note and a mortgage. .
Due diligence has been defined as "the process of investigating all facts, conditions, rules, laws, regulations, financial considerations, or any other such matters as would affect one's decision to purchase property." These things will differ depending on the type of property you wish to buy.
If you were buying a home, you would normally reserve the right to cancel without penalty upon the happening of certain contingencies - failure to obtain satisfactory financing, failure to sell your own home, property does not pass its inspections, etc. When buying investment properties, there are just too many things that could ruin the deal. Many of them will not even occur to you until one question leads to another and then another, until you possibly reach a roadblock. That is why many commercial contracts provide only a general due diligence clause.
A general due diligence clause says you can check anything you need to check. At the end of an agreed-upon time period, it is time to fish or cut bait. You notify the seller that you are proceeding to closing, or that you are cancelling the contract and wish a return of your earnest money.
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