About Earnest Money Deposits
Commercial properties generally require a lengthy study period during which the prospective buyer completes necessary due diligence. The due diligence requires the work of third parties like engineers (who complete environmental studies and boundary surveys) and appraisers. The prospective purchaser will also want to study the condition of the property, interview tenants, and work on lining up financing.
The buyer will customarily offer to put up an earnest money deposit to be held in escrow while this work is completed. Most buyers demand a 30 to 60 day due diligence “study period” during which their earnest money deposit is fully refundable if they opt not to proceed with the purchase. Even though the deposit is fully refundable during the study period, it conveys a certain seriousness in the purchasers intentions.
At the peak of the market, in some cases I saw buyers willing to put up a non-refundable deposit upon contract execution. Typically those buyers reviewed leases and other due diligence information rapidly and before signing the purchase and sale agreement — effectively mimicking an auction purchase.
That said, at the end of the day, the amount of the earnest money deposit is a matter of negotiation between buyer and seller. The buyer wants to keep the deposit as small as possible, and the seller would like to see a larger deposit.
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Tags: due diligence, earnest money
