Short answer: Earnest money is what makes a for sale by owner contract feel real to the seller. What protects you is not the size of the deposit, it is the contingency language that lets you recover it.
- Consideration makes it binding. Earnest money is the usual form, and a contract with none is easier to attack.
- A neutral third party should hold it. Title company or escrow, never the seller directly.
- Your exit is the contingency, not the deposit amount. Inspection periods are the workhorse.
- FSBO deals have no agent checking the paperwork, so every gap in the contract is yours to catch.
A for sale by owner deal has no listing agent, no broker forms and nobody whose job it is to notice that a required disclosure is missing. That is exactly why wholesalers like them, and exactly why they go wrong.
Contents
What earnest money actually does
Earnest money serves two purposes, and only one of them is legal.
Legally, it supplies consideration, which is one of the things that makes a contract binding. Practically, it signals to a seller that you are serious, which matters far more in a FSBO deal where the seller has no agent telling them what is normal.
Earnest money is not a fee for the right to walk away. If you default without a contingency to stand on, the deposit is usually the seller’s remedy, and in some contracts it is not the only one.
How much to put down
There is no legal minimum. What there is, is a credibility threshold that varies by market and price point.
| Amount | How a FSBO seller reads it |
|---|---|
| $10 to $100 | Common in wholesaling, and frequently the thing that makes an unrepresented seller suspicious. Be ready to explain it. |
| $500 to $1,000 | Reads as normal to most sellers on a modest house. Usually the practical sweet spot. |
| 1 to 2 percent of price | What a retail buyer would typically post. Signals real intent, and real exposure if you default. |
The honest tradeoff: a larger deposit gets contracts signed and gives the seller confidence. It also means more at risk if your buyer disappears and your contingency has already expired.
Who holds the money
A neutral third party. A title company, escrow company or, in attorney states, the closing attorney’s trust account.
Never hand earnest money directly to a FSBO seller. If the deal falls apart, recovering it from a private individual who has already spent it is a small claims matter, not a phone call. Sellers occasionally ask for this precisely because they do not know it is unusual, and explaining why calmly is part of the job.
The clauses a FSBO contract has to contain
- Parties and property. Full legal names of everyone on title, and the legal description, not just the street address.
- Price and terms. The number, and how it is being paid.
- Earnest money. Amount, who holds it, when it is delivered, and what happens to it in each scenario.
- Closing date and possession. Two separate things. Say both.
- Inspection or due diligence period. Your actual exit. Length, and what happens if you terminate within it.
- Assignability. If you plan to assign, this has to be here. It cannot be added later without the seller agreeing.
- Title and closing costs. Who pays what, and who selects the closing agent.
- Seller disclosures. Most states require a property condition disclosure. A FSBO seller often does not know this.
- Default remedies. What each side can do if the other fails to perform.
- Signatures of everyone on title. Both spouses where applicable. A contract signed by one owner of two is a problem you will find at closing.
The contingency is the part that protects you
Wholesalers put enormous energy into minimising the deposit and almost none into the clause that actually governs whether they get it back.
An inspection or due diligence period that allows termination for any reason, in the buyer’s sole discretion, within a stated number of days, is the standard mechanism. Two things make it fail: the period being too short to line up a buyer, and the notice requirement being ignored. Most contracts require written notice within the window. Miss the notice and the contingency was decorative.
Diary the deadline the day the contract is signed. More earnest money is lost to a missed notice date than to any other cause in wholesaling.
What is different about an unrepresented seller
- Nobody is checking the file. Missing disclosures, unsigned pages and title surprises are yours to catch.
- Title problems surface late. Order the search early. Heirs, liens and old mortgages that were never released are common.
- The seller may not know what is customary, which cuts both ways. Explaining norms honestly builds the trust the deal runs on.
- Disclosure duties still apply to you. A growing number of states now require you to say in writing, before signing, that you intend to assign.
Frequently asked questions
How much earnest money should a wholesaler put down on a FSBO?
Enough that the seller takes you seriously and not so much that you cannot afford to lose it if your contingency lapses. On a modest house, a few hundred to a thousand dollars reads as normal to most unrepresented sellers. Token amounts are common in wholesaling but frequently create suspicion in a FSBO deal.
Can the seller keep my earnest money?
If you default without a valid contingency, usually yes, and depending on the contract that may not be their only remedy. If you terminate properly within an inspection period and give the required written notice, the deposit should be returned.
Who should hold the earnest money?
A neutral third party: a title or escrow company, or a closing attorney’s trust account. Never the seller personally.
Do I need a real estate agent for a FSBO purchase?
No, but you do need someone competent reviewing the paperwork. In a FSBO deal there is no agent catching missing disclosures or signature problems, so a real estate attorney is money well spent.
Can I assign a FSBO contract?
Only if the contract permits it. Add the assignment language before the seller signs, and in a growing number of states disclose your intent to assign in writing at the same time.
What if only one spouse signs?
If both are on title, you generally need both signatures to convey clear title. A contract signed by one is a problem that surfaces at closing, which is the worst possible time.
FSBO deals are where the margin is, and where the mistakes are
No agent means no safety net, and the gaps that cost people money are always the same handful. Inside the free group we go through real contracts, the clauses that matter and what to do when a seller pushes back. 1,100 wholesalers already in there. No cash, no credit, no license needed.
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Statute of frauds and contract formation, general principles
State property condition disclosure requirements
State escrow and trust account handling rules
State wholesaler disclosure statutes enacted 2024 to 2026
This article explains common practice and is not legal advice. Contract law, disclosure duties and wholesaler licensing rules vary by state and change often. Have a real estate attorney licensed in your state review any agreement before you sign or use it.