What is an Earnest Money Deposit by Mitten Realty Group

Earnest money (EMD) is a deposit made to a seller that represents a buyer’s good faith to buy a home. The money gives the buyer extra time to get financing and conduct the title search, property appraisal, and inspections before closing. In many ways, earnest money can be considered a deposit on a home, an escrow deposit, or good faith money.

The EMD will be placed with a broker, a title company, or a lawyer to hold while the real estate transaction is processing. Who will hold the EMD will vary, depending on the instructions for sale or the negotiated place between buyer and the seller. The EMD is a way to ensure that the buyer is serious about the purchase of a property and not “SHOPPING AROUND” while taking properties off the market. The EMD will be credited on the closing statements.

The buyer’s agent should make sure that there are contingencies in the purchase agreement, so the buyer will get their EMD back under certain scenarios. Some of the scenarios include:

  • Bad inspection
    • At times, the seller will negotiate or work out the issues with the inspection, but when both sides cannot agree, the EMD can be released back to buyer and deal mutually released.
  • Property does not appraise
    • Markets change and properties may not appraise for the agreed upon price. Like the inspection, if both sides cannot come to terms, the EMD is released back to buyer and deal mutually released.
  • Misrepresentation by the seller
    • The property should have a seller disclosure. This is 100% completed by the seller. If there is something that is misrepresented, on purpose or by accident, the parties can find a way to fix the situation or mutually release property and EMD returned to the buyer.
  • Mortgage cannot be approved
    • Approvals are not guaranteeing that the deal will close. There are many other factors that come into play after the purchase agreement is signed and the deal processes. If the lender ends up stating the buyer cannot continue, the EMD is returned and property mutually released.

The amount of the EMD is up to the buyer. Normal EMD amounts are around 1% or 2%, but in particularly good markets, the EMD can be as high as 5% to 10%.

Sellers look at the EMD as part of the strength of the offer. For example, if someone offers $500 EMD on a $500,000 home, the seller will feel as though the buyer is not serious. The seller may also feel it is not an amount worth taking the house off the market for. If a small EMD is part of the purchase agreement, you will want to investigate further with the mortgage lender and if cash deal, proof of funds.

When there are multiple offers, every detail is important, including the amount of EMD placed to secure the property. You want to make the listing agent and seller see your deal as the best opportunity to get to the closing table.

In the case where the EMD is being disputed, you will need to review the purchase agreement to decide how to proceed – some purchase agreements have built in mediation or arbitration clauses. You can contact the other broker, use the local real estate board, or in extreme situations, you may need to use an attorney to get the EMD released. Both the buyer and the seller can try to claim the EMD. Therefore, having contingencies in the purchase agreement and everything in writing as the real estate deal progresses. Besides everything in writing, you will want to make sure all parties sign any changes or addendums.

Here are some situations where the seller has the right to request the EMD be provided to them:

  • Buyer gets cold feet and wants out:
    • Just because the buyer gets cold feet or decides the home is not what they wanted; does not mean they get their EMD back. The seller has taken the home off the market and accepted the EMD as good faith that the buyer wanted the home.
    • Both the buyer and seller will need to review the PA for deadlines agreed upon. If the buyer fails to perform, the seller is entitled to the PA.
  • Buyer cannot perform or close by a specific date:
    • If the buyer cannot perform by the contract date, the seller can request the EMD be sent them.
  • Buyer did not provide accurate information:
    • When the buyer provides documentation to the lender, and it is later found out to be untruthful and the mortgage declined, this is not the same as being denied the loan.

These are just a handful of reasons as to why a seller may have rights to the EMD. Both the buyers Realtor and Listing Realtor should have protections in place for their client.

In the case where the EMD is being disputed, you will need to review the purchase agreement to decide how to proceed – some purchase agreements have built in mediation or arbitration clauses. You can contact the other broker, use the local real estate board, or in extreme situations, you may need to use an attorney to get the EMD released. Both the buyer and the seller can try to claim the EMD. Therefore, having contingencies in the purchase agreement and everything in writing as the real estate deal progresses. Besides everything in writing, you will want to make sure all parties sign any changes or addendums.

Writing up a purchase agreement has more than a price to offer a seller. Realtors are professionals at making sure your offer is written to secure your interests and protect you. Listen to the Realtors advice when they are working on your deal. They do this every day. Although, the Realtor does work for you, and in the end will submit the offer how you feel comfortable, they are the best resource for making deals happen.

If you have any questions about real estate or would like to buy or sell a home, Investment property, or commercial property in Michigan, please e-mail us at info@mittenrealtygroup.com or call 248-294-7850.

Thank you,

Scott Fader and Gary Brincat
Mitten Realty Group, LLC

Mitten Realty Group is a veteran owned company located in Michigan. Scott Fader and Gary Brincat are two of Michigan’s multi-million-dollar top producers. They have been working in real estate as brokers, Realtors, investors, property managers and real estate company owners for over 20 years. Together they would like to share their experiences, knowledge, success and failures to help buyers, sellers, Realtors, brokers and anyone else in the real estate and business, so that together we can grow as a community.

What is a Sellers Market by Mitten Realty Group

A seller’s market occurs when demand exceeds supply, or there are more buyers seeking to purchase homes than there are available homes on the market. This often leads to multiple buyers interested in a single property, resulting in bidding wars. Bidding wars delay you from getting an accepted offer, along with driving up the price of the home.

FOR SELLERS: A seller’s market is a fantastic time to sell your home as you could secure a sale price that’s higher than your listing price, or at least more than your bottom line (the lowest price you’d be willing to accept for your home). As a seller there are things you will still need to be aware of. The first is appraisal – homes still need to be appraised for those using financing. If you are lucky enough to have a cash buy, this does not typically come into play. Sellers should make sure their agents are creative in how they counter and accept purchase agreements. A good Realtor (Listing Realtor) knows how to handle purchase agreements in this type of market.


FOR BUYERS:
If you are buying a home in a seller’s market, be aware that the seller has the advantage. If other buyers are interested in the same property, you are making an offer on, trying to get a lower sale price probably will not work to your advantage. In fact, you could lose the opportunity to purchase the property altogether if a competing buyer makes a higher offer. A seasoned Realtor can help get creative to win when competing in a sellers’ market. Even with the offer not being the highest, there are statements and offers that can be built into the purchase agreement that will get you the bottom line and add value to the seller.

Buyers during a seller’s market feel as though they are getting taken advantage of, and you are right. Seller’s and the Realtors monitor the market and know when the favor turns to them. Remember that markets will flip and become buyer’s markets too. Then the seller’s now feel how buyers did. You can push through these markets on either side. Missing out on your dream home for a higher offer should never be a factor that stops you from buying.

If you have any questions about real estate or would like to buy or sell a home, Investment property, or commercial property in Michigan, please e-mail us at info@mittenrealtygroup.com or call 248-294-7850.

Thank you,

Scott Fader and Gary Brincat
Mitten Realty Group, LLC

Mitten Realty Group is a veteran owned company located in Michigan. Scott Fader and Gary Brincat are two of Michigan’s multi-million-dollar top producers. They have been working in real estate as brokers, Realtors, investors, property managers and real estate company owners for over 20 years. Together they would like to share their experiences, knowledge, success and failures to help buyers, sellers, Realtors, brokers and anyone else in the real estate and business, so that together we can grow as a community.

Real Estate Calculations for Investors by Mitten Realty Group

There is more to understanding investment real estate than the home itself. There are decisions that will need to be made before you purchase the property. You will need to know certain calculations so that you can make the right decision. One decision you will need to make is, are you holding the property to be rented out or are you going to rehab it and flip the property.

Remember, your profit is usually determined when you buy the home, not when it sells. This means if you buy the property for the right price, you will have the profit margins you are wanting.

Using a Realtor, you can get help with some of the information you will need to complete the formulas or double check the numbers. Websites like Zillow and other public sites that offer FREE VALUATION can provide inaccurate information.

Gross Scheduled Income

This real estate formula lets you know how much income your property will generate if all units within it are rented and if there are no defaults in rent payments. This can be a useful measure to compare with your actual income.

Talk with your Realtor and get some rent comps for the area. Many investors guess the rents or place what they think they will be asking. Rental comps are as important as sales comps. You want to be realistic in your calculations. If you get more than what you expected…GREAT!

Gross Scheduled Income = Rental Income + Lost Rental Income from Vacant Units

Gross Operating Income

This figure reflects the gross operating income in addition to all other sources of income from your rental property. This can include revenue from parking spaces, laundry, public vending machines, or others.

Gross Operating Income = (GSI – Lost Rental Income from Vacant Units) + Other Income

Net Operating Income

To use the net operating income formula, you first need to figure out your gross operating income. Once you have that figure, you subtract your operating expenses- things like insurance and maintenance costs. You should note, however, that things like investment property depreciation and interest payments do not factor into operating costs. 

Net Operating Income = Gross Operating Income – Total Operating Expenses

Capitalization Rate

The cap rate is one of the most important real estate formulas. The cap rate formula compares an investment property’s net operating income with its market value, allowing investors to quickly compare properties to see which one is most worth it.

Cap Rate = Net Operating Income / Market Value of Property

Cash on Cash Return

Figuring out your cash on cash return is crucial in real estate investing. It is a widely popular real estate formula since it allows investors to compare investments and evaluate the most profitable one based on the terms of financing. A spreadsheet is a good way to see the side by side comparison between properties that are similar. By setting up the spreadsheet with formulas, you can quick input the basic numbers and see which one is the best property for your investment.

To use the cash on cash return formula, you simply divide your net operating income by your total cash investment. Typically, your total cash investment will include the down payment, closing costs, renovation costs, and any other upfront fees you paid to acquire the investment property.

Cash on Cash Return = Net Operating Income / Total Cash Investment

Equity Build-Up Rate

Smart real estate investments do not always come in the form of immediate income. Some properties are great investments due to their potential to build equity, therefore becoming more valuable assets in the future. This simple real estate formula can help in measuring these gains.

Consulting with your Realtor is also a good way to see how quickly an area is growing in value.

Equity Build-Up Rate = Mortgage Principal Paid (Year 1) / Initial Cash Invested (Year 1)

Price to Rent Ratio 

This figure shows you how much rent you will be receiving, versus the price at which your property was purchased. This can be useful when comparing residential real estate investments. Like other calculations, a spreadsheet with formulas can help make quicker decisions.

Price to Rent Ratio = Purchase Price of Property / Annual Rental Revenue

Price Per Square Foot

Along the same lines, the price per square foot real estate formula can be useful when comparing investments. Savvy investors can use this calculation to evaluate if a rental property is overpriced before it is purchased. Your Realtor can help you evaluate this more in depth by pulling both rental and sales comps, which list out the price per square foot (as-is, not post-rehab).

Price Per Square Foot = Market Value of Property / Property Square Footage

Return on Investment

The return on investment formula allows you to see how much of your initial investment you can recoup annually.

Return on Investment = Annual Returns / Cost of Investment

Cash Flow From Operations

Successful real estate investments will involve more money coming in than going out. You need to subtract your capital expenditures (roughly defined as large expenses that do not reoccur) from your net operating income to figure out your cash flow from operations.

Cash Flow From Operations = Net Operating Income – Capital Expenditures

Cash Flow After Financing

Considering that most real estate investors have borrowed money in order to make their investment, this cash flow formula can provide a better idea of what your cash flow is like.

Cash Flow After Financing = Cash Flow From Operations – Financing Costs

Occupancy Rate

This figure reflects the time that an investment property is rented out over a period. Your occupancy rate is one of the most important indicators of your success, and a low occupancy rate can let you know that action is needed from your end.

Low occupancy can occur when properties are in need of repair. People tend to look for a replacement place to live if a landlord is not keeping the place livable or did not complete some repairs required previously. Landlords can “promise” to fix things to get people to move it, in turn causing them to move out as fast.

Occupancy Rate = Number of Days Occupied / Total Number of Days in One Year

Break Even Ratio

This figure is often used to evaluate risk when making a real estate investment. Too high of a figure when using this real estate formula can indicate that it will be an uphill battle to break even with an investment property and recoup debts.

Break Even Ratio = (Debt Servicing Costs + Operating Expenses) / Gross Operating Income

Gross Rent Multiplier

The gross rent multiplier real estate formula allows investors to figure out the market value of a rental property. This is especially useful when selling a rental property, as it allows you to set the right price the first time.

You will want to compare notes with a Realtor. This calculation can help set the value based on the numbers, but it is always good to have a second pair of eyes.

Gross Rent Multiplier = Market Value / Gross Scheduled Income

Debt Service Coverage Ratio

This real estate formula can be used to figure out the current cash flow you have available to recoup the debt which financed your investment.

Debt Service Coverage Ratio = Net Operating Income – Annual Debt Service

If you have any questions about real estate or would like to buy or sell a home, Investment property, or commercial property in Michigan, please e-mail us at info@mittenrealtygroup.com or call 248-294-7850.

Thank you,

Scott Fader and Gary Brincat
Mitten Realty Group, LLC

Mitten Realty Group is a veteran owned company located in Michigan. Scott Fader and Gary Brincat are two of Michigan’s multi-million-dollar top producers. They have been working in real estate as brokers, Realtors, investors, property managers and real estate company owners for over 20 years. Together they would like to share their experiences, knowledge, success and failures to help buyers, sellers, Realtors, brokers and anyone else in the real estate and business, so that together we can grow as a community.

Southeast, Michigan, especially the city of Detroit is a hotspot for real estate investors across the United States and the world. There are a variety of opportunities for those looking to make money in real estate investing. There are residential and commercial properties that can be held for residual rental income and there are residential and commercial properties priced right to fix-and-flip. Both the buy and hold and fix-and-flip opportunities are different beasts, but with the right due diligence and team, you can be successful.

Before we go deeper into the Detroit market, we should clear up the stigma that surround the city of Detroit. Detroit for many years has been presented as a dangerous, crime ridden city that you would not want to do business in, have a family in, and not go there at night. Does Detroit have crime? Yes, it is a large city and crime does happen. The crime rate is higher than that of a traditional suburban area. This can go for any city, Chicago, New York City, Boston, Orlando, Los Angeles and so on.

Detroit is a growing city. Many large businesses are starting to call it home. Google, Little Caesars, Quicken, GM, many tech start-ups, along with four major sports teams all call the downtown area home.  In fact, the Detroit Pistons moved their operating from the suburbs of Auburn Hills to the downtown area where the Detroit Red Wings play, and major concerts happen. With the growth of the city, Detroit housing values are on the rise again. This is good for not only the homeowners, but for investors.

Without real estate investors, the city of Detroit and many communities would have a lack of rental properties and a higher number of blighted homes. Investors offer homes to those who cannot or do not want to own a home. They also buy homes that need repair to bring them back up to market value to rent or to sell. This brings in local jobs, revenue to the local community (supplies, food, gas and other items needed), and tax revenue. It is a win-win for more than just the investor. Many people benefit when others take interest in a community and bring outside money to spend within it.

Detroit is broken up into many districts. Over time, certain zip codes become able and drive the investors into an area, helping to drive up values and make the area much more appealing to those already there, for renters, and for people looking to buy their next home or investment property. Many of the factors that help drive up these specific zip codes have been, new construction, new businesses, improved amenities (shopping, medical, entertainment) and better forms of public transportation available.

Another factor that drives investors into an area is the type of homes available. Brick homes and multi-family properties become extremely popular to investors, as they can either get more money when they sell, or they will have more capital coming in from renting multiple units.

Price comes into play as much as the location of the property. Investors have revitalized areas that were “off-limits” if you wanted to make a profit from your investment. Investors draw other investors who do not want to miss out on the opportunity to make a profit investing in real estate. There are large areas within the city of Detroit now that are being looked at for the next major redevelopment of revitalizing current houses and enough land to create full brand-new neighborhoods.

Detroit is an endless canvas for real estate investors. With a mix of commercial, residential, land, strip centers, industrial and multi-families, the inventory allows for investors of all levels to have access to the right properties at the right pricing.

Having the right team behind you can make your investing experience much easier, especially for those who do not live locally. Mitten Realty Group has worked with investors locally, nationally, and through the world. Mitten Realty Group has an experienced team that specializes in working with investors, tracking down the right properties, analyzing them, making sure the right resources are available to accomplish the goals of the investors, verifying the title of the properties in question, getting the property for the right price and close it.

If you have any questions about real estate or would like to find out what properties are available in Detroit or Michigan, please e-mail us at info@mittenrealtygroup.com or call 248-294-7850.

Thank you,

Scott Fader and Gary Brincat
Mitten Realty Group, LLC

Mitten Realty Group is a veteran owned company located in Michigan. Scott Fader and Gary Brincat are two of Michigan’s multi-million-dollar top producers. They have been working in real estate as brokers, Realtors, investors, property managers and real estate company owners for over 20 years. Together they would like to share their experiences, knowledge, success and failures to help buyers, sellers, Realtors, brokers and anyone else in the real estate and business, so that together we can grow as a community.