Protecting Your Earnest Money
Earnest money is the deposit you put down when you sign a purchase contract to show the seller you are serious about buying. In wholesaling, earnest money is at risk if the deal falls apart and you do not have proper contingencies in your contract. Understanding how to structure your contracts to protect your deposit while still being attractive to sellers is one of the most important skills in wholesale real estate.
How much earnest money to deposit
Earnest money amounts vary by market, property type, and seller expectations:
- Motivated seller deals: $100-$1,000 is typical. Highly motivated sellers are focused on the purchase price and closing timeline, not the deposit amount.
- MLS-listed properties: 1-3% of the purchase price is standard. Listing agents expect this range.
- REO and bank-owned: $1,000-$5,000 or a specific percentage required by the bank's addendum
- Commercial properties: 1-5% of the purchase price, often $5,000-$25,000
As a wholesaler, keep your earnest money as low as the seller will accept. Every dollar in earnest money is capital at risk until the deal closes or your contingencies allow you to exit.
Contract contingencies that protect you
Inspection contingency
The most important protection. The contract states that the purchase is contingent upon the buyer's satisfactory inspection of the property within a specified period (typically 7-15 days). If the inspection reveals issues you are not comfortable with, you can cancel the contract and receive your earnest money back.
In practice, many wholesalers use the inspection period to secure a buyer. If you cannot find a buyer within the inspection period, you cancel citing unsatisfactory inspection findings and recover your deposit. This is a common strategy, but be aware that using inspection contingencies disingenuously (with no actual inspection) can damage your reputation with sellers and agents.
Financing contingency
If the contract is contingent upon obtaining financing, you can cancel and recover your deposit if financing is not approved. This contingency is less useful for cash offers (which most wholesale deals are) but applicable if you are using hard money or any form of lending.
Due diligence period
Some states (North Carolina, for example) use a due diligence period instead of traditional contingencies. During this period, the buyer can cancel for any reason and receive the earnest money back (minus the non-refundable due diligence fee, which is separate from earnest money).
Partner approval clause
A clause stating the purchase is subject to approval by your business partner or investment committee. This provides an exit without specifying a reason, though sophisticated sellers may push back on this language.
Title contingency
The purchase is contingent upon clear and marketable title. If the title search reveals issues that cannot be resolved, you cancel and recover your deposit. This is a standard contingency that all sellers expect.
Where to deposit earnest money
Earnest money should always be deposited with a neutral third party:
- Title company: The most common and recommended option. The title company holds the funds in escrow until closing or cancellation.
- Real estate attorney: In attorney-closing states, the attorney's escrow account holds the deposit.
- Brokerage escrow: If a real estate agent is involved, their brokerage may hold the deposit in their escrow account.
Never deposit earnest money directly with the seller. If the deal falls apart, getting your money back from an individual is far more difficult than recovering it from an escrow account.
When you lose earnest money
Earnest money is at risk when:
- All contingency periods have expired and you back out without a valid contractual reason
- You fail to close by the closing date without an agreed extension
- You signed a contract with no contingencies (as-is, no inspection, no financing) and need to cancel
- You breach a material term of the contract
Best practices for wholesalers
- Always include an inspection contingency with a reasonable period (10-15 days minimum)
- Keep deposits as small as possible while still being competitive
- Deposit with a title company, never directly with the seller
- Track your contingency deadlines and make decisions before they expire
- If you need to cancel, do so in writing before the contingency deadline
- Build a reputation for closing deals. Sellers who trust you will accept lower deposits.
Related articles
- Earnest Money in Wholesale Deals
- Wholesale Contracts Explained
- How to Handle the Inspection Period
- Proof of Funds Guide