RV Park Mastery: Episode 86

Non-refundable Earnest Money? Just Say No

The standard construction of an RV park purchase contract is for the buyer to put up refundable earnest money, subject to the findings of due diligence and financing. However, some sellers and brokers will float the idea to you of that earnest money being non-refundable on day one. In this RV Park Mastery podcast we’re going to drill down on this concept and why it’s always a bad idea for the buyer.

Episode 86: Non-refundable Earnest Money? Just Say No Transcript

The typical construction on any RV park deal is that you have a contract signed by both parties at a title company with earnest money, and that earnest money is refundable if you cancel for any reason during your due diligence or financing provision. But sometimes the seller will say, no, that isn't good enough for me. I want to have non-refundable earnest money. What do you do? Well, this is Frank Rolfe, the RV Park Mastery Podcast, and we're gonna focus on that topic. What happens when the seller wants non-refundable earnest money, or some people call it, hard money on the front end of the deal. Well, the first problem is that that definitely should be sending you a signal that there's something wrong with a property, because otherwise, what is a seller so afraid of? If you suddenly on any deal add a paragraph that simply says, I'm gonna be doing some diligence and trying to get a bank loan, and you say, oh no, gosh, if you're gonna go through those hoops, I gotta have some money in advance that can't be refunded.

What does that tell you? It tells you that seller believes there's something wrong with their property or that you can't get a loan. My brother used to work for a large real estate company in New York. One of the assets they own was a piece of property. They used to have a big rail yard on it, and they knew full well that that property really could not be developed very easily. So what they would do is, people would come to them saying, I wanna buy the big old rail yard property. And they would say, ah, well, if you want the big railroad property, we'll only put it under contract to you with a non-refundable earnest money amount of X. And every single time someone took the bait and they did it, guess what? They never ended up buying it and they lost their earnest money. And the concept was if they repeated it enough and enough and enough, that alone would be the sole income source from that land.

But it's a trap typically, when someone tells you, oh, yeah, well, I can go ahead and sign your deal and sure, I can give you the ability to check out the property and all, but you know, your earnest money can't be returned to you. That to us, that's just a terrible, terrible sign because how can you risk money on something that you don't know yet? Remember that the seller knows everything about the property. They've owned it, they've operated it, they know exactly how many customers they get. They know every flaw and all the infrastructure permitting issues, everything. They know when the flood hits, how many lots get flooded, how deep does it get. They know it all. And what do you know as a buyer on the front end? You don't know anything. Nothing at all. So you're walking into this ambush if they want hard money where you are at a complete disadvantage, they have every possible card revealed to them, and you don't have any at all.

All you know is roughly the name of it and the numbers that you get from the seller and the location and all. But the seller, he gave you that information. So how without verifying what he's done, can you possibly put hard money behind that? Just doesn't make any sense, right? So since you can't get the information you need prior to putting under contract and you're relying on the seller for the information, it's safe to say that if they are so afraid of what that information will tell you that you might cancel immediately, that you should not do that.

Also, what if it goes beyond your ability? What if it's you can't get a loan because the lending market is screwed up? We all know America right now has got some huge economic problems. We've got a crazy Fed chairman, Jerome Powell, we've got a crazy administration. We're just one screwed up place right now. And what if through no cause of your own, you couldn't get the deal completed, you do all the due diligence yourself and that all looks good, but then you go into the financing arena and now suddenly you can't get the bank loan you wanted. Once again, you need the ability to cancel. It's not fair to you to put on your shoulders all the risk and burden of a financing market that none of us can really control.

So you shouldn't do that to yourself. You need to give yourself the freedom to move in and out of deals based on what the market dictates to you. You can't dictate the market and what's going to happen. Now, we've got many stories of where people ask of us hard money, and you know what we've done in all these years and 30 years of buying RV parks. You know how many we've done with hard money? And the answer is none because we don't like the idea. We don't think it's a fair request for the seller to make to you as the buyer and say, oh, well, you know, even though you don't know anything about the property, and I do, and even though you have no control over the banking industry, I'm gonna make you risk your hard-earned money just to have the shot at it.

We don't think that's a fair way to go. We think that basically the seller is in a much more powerful position than the buyer, and therefore, it's not fair of the seller who knows at all to make the buyer bear all of the risk. But there's other problems with hard money even beyond that because when you have hard money on the loan, the message it sends to the seller is that you now have this hurdle and that is going to go ahead and alter your mental state on whether to cancel or not. And they know that. So if I had $15,000 up in hard money on a deal, and I will go through my due diligence and I go through my financing, and things aren't exactly as I hoped they might've been, am I gonna cancel and walk that $15,000? Maybe not. Maybe I'll say, well, I don't really like the deal that much, but I'm gonna go forward anyway and buy it.

And that is a terrible thing to do. We all have gut instincts deep inside of our brain telling us what to do in life. This is some of all of our lessons learned throughout our lifetime. And when you start swaying that, blackmailing that, dangling the carrot or the club, that money that you put up, that's going to definitely help make you come to bad decisions. You're gonna be tainting your decision making ability. And that's what that hard money does, is it puts you in the unfair position of making decisions that are partly based on the factual beliefs you have and partly on your fear of losing money. Now, if you felt for some deal that is a once in a lifetime thing, you just have to do it, then I guess you could do some hard earnest money. But I would urge you to make it incredibly small, make it small enough that you can lose that money and still be happy.

You would never put up a huge amount that you might find financially crippling or that might mentally make you sad till the end of your life, because that's just not a very healthy balance to do. But there are some deals that pop up from time to time that you believe cannot be replaced, once in a lifetime opportunities. And if all that was holding you back from tying that once in a lifetime opportunity up was putting up $5,000 of non-refundable money, then I guess it might make sense to you. But unless the amount is very, very small, and unless you can happily move forward with your life after losing it, I don't think I would because it's going to potentially change your decision making and get you into a bad deal. And that's not a fair position for you to ever be in. The whole point of earnest money, in fact, is simply to give liquidated damages to the seller in the event that you don't close.

But only after you've looked at the property in full. It's not fair for them to want you to put up money as though you've looked at the property on the front end. They don't need liquidated damages at that point. If I tap up your property for a few months and ponder whether to buy it or not, have I really harmed you? No, I haven't harmed you at all. You're still operating, bringing in the revenue, paying the cost, and keeping the difference, keeping the net income. So you don't need any kind of special liquidation settlement amount. That's only there in cases that the person plows through due diligence and financing and says, Hey, I'm gonna buy it. And then ties the seller up for a period of time where they can't move forward to do anything with it or sell it or finance it or anything.

And then at that point, if they don't close on it and they've burned through several months and legal costs and closing costs, then it would be appropriate for them to have some kind of surrender cash to reimburse them, but not when you're simply buying it on the front end. Again, the decision's up to you and a seller wants you to do that, that hard money, that non-refundable earnest money. Whether or not you want to take the bait on that or not, but in general, the best decision is probably to pass. This is Frank Rolfe, the RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.