Let’s face it, good faith deposits in commercial real estate (CRE) are here to stay.
Sellers are not willing to go back to the days when they entertain potential buyers who are only playing about. Good faith deposits help them to narrow the field to serious buyers only.
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Given the importance of good faith deposit in CRE today, CRE investors must seek to understand how it works and how they can navigate it to their benefit.
In what follows, we will seek to answer some crucial questions about good faith deposits.
What is a good faith deposit?
A good faith deposit is a portion of the purchase price of a property that the seller demands from potential buyers before they can inspect the property or negotiate its terms. As said above, sellers use it to separate serious buyers from unserious ones.
Are good faith deposits a legal requirement?
Though no law requires them, they have become a norm in the commercial real estate market.
Sellers demand them and buyers are learning how to adjust to that reality, even competing with each other for who can pay the highest good faith deposit.
How much can you expect to pay as a good faith deposit?
Since it is not a legal requirement, there is no regulated price.
By common practice, good faith deposit tends to range from 0.5% (in a place like Iowa) to 10% (in places like Michigan, New York, and Alaska).
The key thing to know is that the demand will be higher in hot markets and for hot properties.
How are good faith deposits used?
Good faith deposits are held by an escrow.
If the deal succeeds (after inspection and negotiation), good faith deposits are used to finance part of the closing costs of the transaction. In cases where the buyer is relying on a mortgage, they can also be used as part of the downpayment for mortgage financing.
Are good faith deposits refundable?
In cases where the deal does not succeed, good faith deposits may be refundable.
The key issue is whether the reason the deal failed was included as part of the contingencies in the purchase and sale agreement.
Some common contingencies include financing (if the buyer cannot raise the needed funds), inspection (if the buyer is not satisfied with the results of the inspection), sale (if the seller cannot sell another property whose proceeds they wanted to use to purchase the property), and appraisal (if the seller increased the price and the seller cannot or does not want to pay).
If the deal failed for any other reason outside these previously agreed contingencies, the potential buyer can still get a refund if the failure is from the seller’s side. Otherwise, the good faith deposit will be non-refundable.
How can you use good faith deposits to your advantage?
Buyers are now using good faith deposits as a way to gain a competitive advantage either by paying first or offering a higher amount than others.
Thus, if you can get good faith deposits quickly and get higher amounts, you can close more CRE deals and build a profitable portfolio.
One way to do this is to have a good faith deposit financing company that can provide quick and regular good faith deposits.
This is one thing that a company like Duckfund provides. You can get good faith deposits (minimum of $25,000) for as many deals as you want even at the same time (concurrently). Also, you can complete the application in 2 minutes and get the funds delivered to an escrow in 48 hours.
If you want to know how to finance a commercial property without liquidity, you can start by getting your good faith deposits with Duckfund. With good faith deposits out of the way, you can focus on securing funding for the property’s purchase price.
