Is EMD Funding Legal, and Do You Get the Deposit Back If the Deal Dies?

Investors ask this because EMD funding (also called gator funding) can sound like a workaround. It is not. But like any loan, the details decide whether a specific deal is clean. This is general information, not legal advice.

Is it legal to borrow earnest money?

Borrowing money for a business purpose, including a deposit on an investment purchase, is a normal transaction. The earnest money deposit (EMD) is just money placed in escrow under a purchase contract. Who supplied it does not change what the deposit is.

What can create problems is the surrounding structure:

• The purchase contract. Some contracts have terms about the deposit, its source or who must deliver it. Read them.
• The purchase lender. If the purchase itself will be financed, that lender may have its own rules about where the deposit came from. Tell them up front. Our post can you borrow earnest money without hurting the loan? covers this.
• State rules. Rules on private lending, fees and real estate transactions vary by state.
• The title company. Title and escrow companies have their own procedures for receiving deposits from third parties.
• An assignment. If you plan to assign the contract, the new parties must also sign for the EMD so the funded deposit remains assignable.

Axelrad's EMD funding is for investment deals and business-purpose buyers, and we review the contract and the title company before confirming whether and when funding is available.

What makes an EMD funding deal clean?

• A written funding agreement signed before any money moves.
• The deposit wired directly to the title or escrow company, never to a person.
• A refundable deposit with clear contingency deadlines.
• A fee stated in writing before you sign, whether it is a flat amount or a percentage of the deal, with a clear repayment trigger. At Axelrad the fee is typically a percentage of the deal, with a $500 minimum and flexibility for investors doing their first deals.
• A title company that knows how the deposit was funded.

Do you get the deposit back if the deal dies?

It depends on the contract, its deadlines and why the deal ended. Broadly:

1. Inside a contingency period. If the contract lets you cancel (for example, during an inspection or due-diligence period) and you give proper notice on time, the deposit is typically returned from escrow.
2. After a contingency expires. The deposit can go hard. The seller may be entitled to keep it.
3. Disputes. If buyer and seller disagree about who gets the deposit, escrow may hold it until the dispute is resolved under the contract and local rules.

Our post is earnest money refundable if a deal falls through? walks through contingencies, notice deadlines and deposit release.

What happens to the EMD funding if the deal dies?

At Axelrad, we fund fully refundable deposits only. If the deal cancels inside your contingencies, nothing more is owed: the refunded deposit comes back to Axelrad out of escrow, the fee was paid up front, and none of your own cash was ever in the deposit. We do not charge a failure or non-performance fee.

The exposure is after a contingency expires, when a deposit can go hard. So tell us the moment a deal starts to wobble, before a deadline passes, and give your cancellation notice on time.

What are the red flags in an EMD or gator offer?

• No written agreement.
• A request to wire to a personal account.
• Pressure to fund a deposit that is non-refundable from day one.
• Vague terms on the fee or on what happens if the deal dies.
• A failure or non-performance fee charged on top of the deposit when a deal cancels inside its contingencies.
• A funder who will not talk to your title company.

For more on vetting an offer, see is gator lending legit?.

Do you need an attorney?

For anything beyond a simple, refundable deposit with a clear agreement, it is worth it. Rules vary by state, title companies vary, and a real estate attorney in the property's state can tell you what applies to your structure.

Key takeaways

• EMD funding is generally an ordinary business-purpose loan for a deposit held in escrow.
• The purchase contract, any purchase lender, state rules and the title company all affect whether a structure fits.
• A deposit is typically refundable only inside the contract's contingency period with proper notice.
• Axelrad funds fully refundable deposits only. If the deal cancels inside contingencies, the deposit comes back to Axelrad and nothing more is owed; there is no failure fee.
• Get it in writing, wire to escrow, and have a real estate attorney review anything unusual.

Talk to Axelrad

Want a deposit funded the clean way? Send your contract through Axelrad's application. See EMD funding for what we need.