Housing

Real Estate Q&A: How Large Should an Earnest Money Deposit Be and What Should I Do With a Bad Property Investment?

What to Do With a Bad Real Estate Investment :: Mint.com/blog

Zillow real estate investment writer and long-term investor Leonard Baron, MBA, is answering questions from MintLife readers.

If you have a question about investment properties, cash flows, insurance, mortgage financing, homeowners associations, renting versus owning, foreclosures and more, drop Leonard an email.

Earnest Money Deposits

Mike of Oakland, CA asks:

I’m trying to buy a property that has multiple offers, and my real estate agent says I should do a bigger earnest money deposit around 5 percent of the purchase price.

I thought 1-2 percent was customary? What are your thoughts?

Answer: That is a pretty large earnest money deposit, but if that is what it takes to get your property under contract, it may be worthwhile.

That being said, I would make sure that you read and follow all the contingencies in the contract.

Usually for the first 10-17 days of the contract, you can cancel based on a home inspection, financing or appraisal contingency.

But, all of those contingencies and timeframes are negotiated between you and the seller in the written contract.

Once your timeframe passes and/or you fail to extend a contingency – in writing with the seller – your deposit could be at risk if you default on the contract.

Make sure you know when your money becomes “at risk.”

I would specify in the contract that your earnest money deposit should be held by the listing broker in the listing broker’s account.

A seller may request to hold the deposit, but if there is a problem, it will likely be much harder to get your money back from them than the listing broker.

Bad Investments

Gilbert of Phoenix, AZ asks:

I bought a house in Cleveland two years ago for just $7,000 cash. I thought it was such a great deal because it was so cheap.

I didn’t go look at it and just bought it based on pictures and a recommendation from a real estate agent.

Turns out it isn’t in very good shape and needs about $20,000 worth of work. And, I can’t get it rented until that work is done.

I’ve tried but can’t sell it either, and I’m getting code violation notices from the city because it is in disrepair.  

Any guidance?

Answer: I’m sorry to hear about your situation, Gilbert. Unfortunately, this is what happens when people buy real estate with a get-rich-quick scheme.

The reality is there are no cheap deals or great deals.

An individual should never buy a property without doing their due diligence.

It’s likely the most expensive and riskiest purchase of your life, so make sure you know the area, do an adequate inspection and get bids on necessary home improvements.

Your best bet is to cut your losses and dump the property. You need to get your name off the title to shield yourself from liability.

Make sure to keep adequate liability insurance, if you can, until you are done with the property.

Since there is no loan, there won’t be a lender foreclosing on it. You might want to see if there are some housing advocate groups in Cleveland that will take the property for free.

Otherwise, consult an attorney on the best way to remove yourself from the title. Good luck.

Leonard Baron, MBA, CPA, is Zillow’s real estate investment writer, a San Diego University lecturer and real estate due diligence expert. As America’s Real Estate Professor®, his unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions.