How to Collect Earnest Money When Paper Flipping a House
- Ronda Sharp
- Jul 2
- 2 min read
What Is Earnest Money?
Earnest money is a good faith deposit from a buyer showing they’re serious about completing the deal. In paper flipping (property wholesaling) , you typically collect this from the end buyer (the investor you assign the contract to), not the original seller. It’s your insurance that the buyer won’t back out without a valid reason.
Why Collect Earnest Money When Paper Flipping a House?
Here’s why it’s so important:
✅ Filters out the serious buyers
✅ Creates a binding agreement with your end buyer
✅ Gives you leverage and protection if the buyer backs out
Although earnest money is not required, it is important to collect (an agreed amount) to show both the buyer and the seller that the transaction will be purchased in good faith. In some states, collecting earnest money is required. Check with your local real estate attorney to determine if it is required. If your buyer doesn’t have skin in the game, they’re more likely to walk away from the deal or delay closing—and that puts your deal at risk. Although the deposit is paid in advance, it is credited towards the purchase price during closing.
When Do You Collect It?
The earnest money deposit amount and where it will be held should be mentioned on the Purchase Agreement and the assignment agreement. It should be collected right after the assignment contract is signed. This secures the buyer’s commitment to purchase the rights to your original deal.
Who Holds the Earnest Money?
Never hold it yourself. Instead, use:
A title company
A real estate attorney (if required in your state)
A licensed escrow company
This keeps everything professional and transparent.
How Much Should You Collect?
This can vary based on the deal size and your market, but a good rule of thumb is:
$1,000 – $3,000 for average deals
Or 1%–3% of the purchase price
The amount is non-refundable unless certain conditions are met (like title issues, etc). Ensure that the refund stipulations are clearly outlined on both the purchase and assignment agreement.
What Language Should Be Included On the Agreements?
Your assignment and purchase contract should include:
The amount of earnest money
Deadline for it to be deposited (e.g., within 1–2 business days)
Where it will be held (title/escrow company)
Whether it’s refundable or non-refundable
What happens if the buyer fails to pay
Clear terms now mean fewer headaches later.
❗ Pro Tip: Watch for Red Flags
Be cautious if a buyer:
Refuses to put up earnest money
Asks for a long deposit window
Tries to pay in cash directly to you
These are signs they may not be serious—or may not close at all.
Final Thoughts
Collecting earnest money when paper flipping a house isn’t just a formality—it’s a smart business move. It protects your deal, your time, and your money.
Set clear expectations, work with a trusted title or escrow company, and always get it in writing.
The information in this article are of the experience and opinion of the author. Due diligence should always be done before investing in real estate.
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