Real Estate Articles

Earnest Money

Written by Brent Pace for Gaebler Ventures

Looking to buy some real estate for your small business? Then you'll need to learn about the earnest money deposit.

Many up and coming entrepreneurs struggle to secure work-space for their fledgling business.

Earnest Money

One thing many folks are looking at is converting residential homes on the fringes of business areas into office space. It's an alternative to renting expensive space downtown. If you are looking to do this you will have to play the game by the residential rules; and to do that, you need to know about the earnest money deposit.

What Is Earnest Money?

When you make an offer on a home, you often include a check called earnest money to show the seller that you are serious. For homes in real estate markets that are really on fire, this amount could be in excess of 5% of the home's asking price. In slower markets the amount could be much lower, perhaps around $1,000.

The purpose of the earnest money, showing the seller how serious you are, is defeated if the check is too low. You want to make sure the amount is in keeping with what is done in the market place. If you are using a broker, be sure to consult him or her prior to executing the check.

How to Make an Unsolicited Offer

For the entrepreneur, the key will likely be to make an unsolicited offer. A home in the right location that is ripe for conversion may not be for sale. But, like the saying goes, everything is for sale; it's just a matter of price.

When you make an unsolicited offer you have to send an earnest money check accompanied by a letter of intent. In this instance, the seller indicates his acceptance of the offer by depositing your check. In order to preserve your flexibility, in the event that the deal falls through in the due diligence process, you should make sure that the check is deposited in escrow with a title company or something of a similar nature.

To be effective in this offer the earnest money check has to be a significant amount, and the purchase price being offered for the home has to be satisfactory. In addition, your letter needs to specify that you receive a certain amount of time to execute due diligence and closing.

Due Diligence

The big key in making a residential-to-office conversion will be the local planning and zoning rules. Use your due diligence time to make sure that you will be able to operate a business from that location. This may include rights to having the proper signage out in front of your office as well as investigating the potential complaints of neighbors if some adjacent homes remain in residential use.

Another big issue that is often forgotten in this instance is the home inspection. If you were buying a home to live in, you would place a lot of trust on a home inspection conducted by a third party. Although you will be running a business from this location, you will want to make sure that the house is functioning and in good repair. Plumbing, electrical and exterior maintenance issues are the most common problems you will deal with in buying a home.

Brent Pace is currently an MBA candidate at University of California at Berkeley. Originally from Salt Lake City, Brent's experience is in commercial real estate development and management. Brent will have tips for small business owners as they negotiate their real estate needs.

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