It's time.
You've done the work. You've become an area expert and now you've found a property development site that fits all your criteria after using my Rapid Elimination Method. It's time to put in an offer.
Chances are you've only bought one or two properties before, if any, whereas the real estate agent has done this hundreds of times. The agent confidently tells you that a 10% deposit is required. It may even be preprinted on the contract.
But stop! Is the agent telling you the truth?
As a starting point, let me just say that every state has its own laws in this area, but rather than spending a whole lot of this article breaking that down, I'm going to focus on general concepts around paying a deposit. Before you sign anything, do your own research to determine the facts for your own location.
Holding Deposit
Generally, you pay your deposit in two parts. The first of these is usually called a "holding" deposit, and is paid around the time you make your offer. It's often framed as a gesture you make to show that you're serious about buying the property.
In many states, this payment is refundable if you withdraw your offer during the cooling off period (if one applies). Mostly, a fee will be deducted if you do withdraw.
Now from the agent's point of view, they want your holding deposit to be bigger than any fee you might have to pay if you withdraw, because otherwise they have to chase you for the balance, which they most definitely DON'T want to do. So naturally they're going to push you to pay at least as much as the penalty fee upfront.
Of course they don't say that's why they want a certain figure! They'll just focus on pressuring you to pay that much "to show you're serious" or tell you that others have paid more which will give those buyers more credibility with the vendor.
Most state laws, though, only require a financial consideration to be paid. In other words, as long as some money has been paid, it's enough. Hence the possibility, sometimes championed in the past, of buying a property for $1 down. Technically, $1 is financial consideration, and so you can legally do it.
Be aware, though, that using that sort of tactic is not going to be popular with the agent and will most likely make them less than positive when presenting your offer to the vendor.
Having said that, though, don't be pressured into paying a big sum of money either. There's an element of opportunity cost here. If you have $10,000 available to pay, you can choose to put it all on one offer, or pay $2,500 each on 4 offers. So try to strike a balance between paying enough to be credible but still paying as little as you can. Having a deposit strategy can improve your property development negotiation outcomes.
Contract Deposit
This is the balance of your deposit, and timing of when this is due is negotiable. Most contracts will have a due date of when the contract becomes unconditional for the balance of deposit, but again, you can negotiate that date. Delaying the deposit can be beneficial if you have a long settlement, for example. Flexible contract terms are a key part of property development deal structuring.
The amount of deposit to be paid is often cited as 10%. Agents will even tell you 10% is legally required, and standard REI contracts in some states have it preprinted on the form or automatically calculate it at 10% if the contract is filled out electronically.
Again, check what the law actually requires in your state, and change it to a different amount if that's what suits you better. The main thing to keep in mind here is that the agent's commission generally gets paid from the deposit, so as a general rule of thumb it helps to pay enough to cover their commission if you want them to be supportive of your offer!
The size of the deposit can also be a negotiating tool. If you have to tie up cash with a big deposit, then you have holding costs to pay. But if you pay a smaller deposit and save the interest, you can then add that saving onto the purchase price - which means the vendor ends up with more in their pocket. Using deposit size strategically can influence both cash flow and purchase negotiations.
Early Release of Deposit
It's also important to understand that your deposit goes into the real estate agent's trust account and sits there until settlement. That's not much use to either yourself or the vendor, when it could be put to better use.
If you have an agent and are putting in an offer with a delayed settlement, then the agent potentially won't get paid for 12, 18 maybe even 24 months. That's not going to feed the agent's kids next week.
In many states, you can give permission for the deposit to be released early, which will make the agent happy if they can then claim their commission. Based on how much you've paid, it may also make the vendor happy if they're in the process of buying another property and they want to use your deposit to fund the deposit on their next house.
This is where knowing the vendor's needs is really important. For example, if they need $50,000 as a deposit to get into a nursing home, then use that as a negotiating point. One possible scenario is to put in a $50,000 deposit upfront, and release it early if they're willing to give you a 12 month settlement period, rather than paying a bigger deposit. That way they get what they want - money to pay the nursing home deposit, and you get what you want - delayed settlement so you can get your developmental approvals without holding costs. Aligning your offer structure with vendor needs is a powerful property development negotiation strategy.
Inside the Property Development Formula, we show how to structure offers, negotiate terms and use strategies like deposits and settlement timing to secure better development deals.
In summary, don't be pressured by an agent or the vendor's lawyer into paying what is considered the "industry norm" as a deposit. Instead, focus on what the vendor actually needs, what works best for you, and if an agent is involved, making sure they're looked after too. That way, everybody wins, and your offer has a much better chance of being successful.
You've done the work. You've become an area expert and now you've found a property development site that fits all your criteria after using my Rapid Elimination Method. It's time to put in an offer.
Chances are you've only bought one or two properties before, if any, whereas the real estate agent has done this hundreds of times. The agent confidently tells you that a 10% deposit is required. It may even be preprinted on the contract.
But stop! Is the agent telling you the truth?
As a starting point, let me just say that every state has its own laws in this area, but rather than spending a whole lot of this article breaking that down, I'm going to focus on general concepts around paying a deposit. Before you sign anything, do your own research to determine the facts for your own location.
Holding Deposit
Generally, you pay your deposit in two parts. The first of these is usually called a "holding" deposit, and is paid around the time you make your offer. It's often framed as a gesture you make to show that you're serious about buying the property.
In many states, this payment is refundable if you withdraw your offer during the cooling off period (if one applies). Mostly, a fee will be deducted if you do withdraw.
Now from the agent's point of view, they want your holding deposit to be bigger than any fee you might have to pay if you withdraw, because otherwise they have to chase you for the balance, which they most definitely DON'T want to do. So naturally they're going to push you to pay at least as much as the penalty fee upfront.
Of course they don't say that's why they want a certain figure! They'll just focus on pressuring you to pay that much "to show you're serious" or tell you that others have paid more which will give those buyers more credibility with the vendor.
Most state laws, though, only require a financial consideration to be paid. In other words, as long as some money has been paid, it's enough. Hence the possibility, sometimes championed in the past, of buying a property for $1 down. Technically, $1 is financial consideration, and so you can legally do it.
Be aware, though, that using that sort of tactic is not going to be popular with the agent and will most likely make them less than positive when presenting your offer to the vendor.
Having said that, though, don't be pressured into paying a big sum of money either. There's an element of opportunity cost here. If you have $10,000 available to pay, you can choose to put it all on one offer, or pay $2,500 each on 4 offers. So try to strike a balance between paying enough to be credible but still paying as little as you can. Having a deposit strategy can improve your property development negotiation outcomes.
Contract Deposit
This is the balance of your deposit, and timing of when this is due is negotiable. Most contracts will have a due date of when the contract becomes unconditional for the balance of deposit, but again, you can negotiate that date. Delaying the deposit can be beneficial if you have a long settlement, for example. Flexible contract terms are a key part of property development deal structuring.
The amount of deposit to be paid is often cited as 10%. Agents will even tell you 10% is legally required, and standard REI contracts in some states have it preprinted on the form or automatically calculate it at 10% if the contract is filled out electronically.
Again, check what the law actually requires in your state, and change it to a different amount if that's what suits you better. The main thing to keep in mind here is that the agent's commission generally gets paid from the deposit, so as a general rule of thumb it helps to pay enough to cover their commission if you want them to be supportive of your offer!The size of the deposit can also be a negotiating tool. If you have to tie up cash with a big deposit, then you have holding costs to pay. But if you pay a smaller deposit and save the interest, you can then add that saving onto the purchase price - which means the vendor ends up with more in their pocket. Using deposit size strategically can influence both cash flow and purchase negotiations.
Early Release of Deposit
It's also important to understand that your deposit goes into the real estate agent's trust account and sits there until settlement. That's not much use to either yourself or the vendor, when it could be put to better use.
If you have an agent and are putting in an offer with a delayed settlement, then the agent potentially won't get paid for 12, 18 maybe even 24 months. That's not going to feed the agent's kids next week.
In many states, you can give permission for the deposit to be released early, which will make the agent happy if they can then claim their commission. Based on how much you've paid, it may also make the vendor happy if they're in the process of buying another property and they want to use your deposit to fund the deposit on their next house.
This is where knowing the vendor's needs is really important. For example, if they need $50,000 as a deposit to get into a nursing home, then use that as a negotiating point. One possible scenario is to put in a $50,000 deposit upfront, and release it early if they're willing to give you a 12 month settlement period, rather than paying a bigger deposit. That way they get what they want - money to pay the nursing home deposit, and you get what you want - delayed settlement so you can get your developmental approvals without holding costs. Aligning your offer structure with vendor needs is a powerful property development negotiation strategy.
Inside the Property Development Formula, we show how to structure offers, negotiate terms and use strategies like deposits and settlement timing to secure better development deals.
In summary, don't be pressured by an agent or the vendor's lawyer into paying what is considered the "industry norm" as a deposit. Instead, focus on what the vendor actually needs, what works best for you, and if an agent is involved, making sure they're looked after too. That way, everybody wins, and your offer has a much better chance of being successful.
