Earnest money or funding at the closing table: which side of a luxury assignment would you rather put money into?

Question

Two operators have approached me in the last month and they want opposite things.

The first wants deposit money. He's got sellers who won't take a 5k good faith check on a 1.9M house and he needs 40k to 60k sitting in escrow to be taken seriously by the seller's attorney. My money buys the option period. If he finds the buyer, I get paid out of the fee. If he doesn't, my money is somewhere between slow and gone depending on what the escrow terms say and how that state treats deposit release.

The second wants closing-table money. He'd rather take title for a few hours and sell to his end buyer the same day, which means he needs the full purchase price for that window. That's a bigger check, and there are transfer tax and recording consequences that differ a lot by state, but my exposure only exists once there's a real buyer with real money on the other side.

So one is a small check against real uncertainty, and the other is a large check against almost none, at least in theory. The first one has a lot more of these deals. The second one has maybe two a year.

I can't tell which risk is actually mispriced. Curious where the capital people in here sit, and where the operators think their money is best spent.

devon_pierce · Answer

The two aren't the same product and I'd price them differently rather than pick.

The deposit money is a bet on his ability to sell the contract. That's the hard half of luxury wholesaling. If the buyer pool for distressed high-end houses in his market is eleven people and he knows four of them, you are funding a coin flip and you should be paid like it, or you shouldn't fund it. Ask him for the actual disposition record: how many luxury contracts he's taken down and how many assigned. If the answer is vague, that's your answer.

The closing-table money is a bet on paperwork. The end buyer exists, the funds are committed, and your risk is that something fails between the two closings. Real risk, smaller risk, and you can inspect it by reading the second contract before you commit.

What I'd actually want to know, meridian, is what happens to your deposit in the first scenario when the deal dies. Whether escrow releases it, and how fast, depends on the contract language and on state escrow practice, so get a real estate attorney in that state to read the escrow terms before you wire anything. That single clause is most of the deal you're being offered.

Earnest money or funding at the closing table: which side of a luxury assignment would you rather put money into?

1 reply