Wow -- this offer has red flags all over it. Asking for 2% closing help, 100% finance and a promissory note for the earnest money? Sounds to me like this guy is setting himself up to be foreclosed on in a year by not being able to afford to buy a home. In all the times we've sold a home we've never had anyone give us a promissory note in lieu of earnest money and given the other factors in the offer concerning financing, I don't think I'd take the offer. Does he have a pre approval letter from a bank? His finances sound very shaky to me and I personally don't think I'd want to take my home off the market during prime selling season for someone with shaky finances.

Used to be more common on starter houses.
As long as he gets to the settlement table the rest is his problem.
The issue is if he can get there.

My realtor says that the buyer is pre-approved, and is able to close in less than 30days. Since I do want to sell this house as soon as possible so I can go shopping for my next house, the "close in 30 days" sounds attractive, BUT this offer w/ promissory note sounds really "loosy goosy." I've actually countered with something outrageous so to get rid of this prospective buyer, but he still keeps coming back with counters, and being persistent. I feel kind of guilty because my realtor is actually taking time to entertain this offer and worked numbers to decrease brokerage fee to help get this deal thru.....BUT I still have a problem about accepting promissory note. Is this how the market is now? Since it's a buyer's market, is this what buyers are doing with their offers? (using promissory notes for earnest money?)

Anyway, anymore thoughts?

It is common for a promissory note to accompany the offer, but they are usually redeemed upon acceptance of the offer, otherwise what is the point?

My understanding is that earnest money is put up to protect the seller in the event the buyer 'flakes out', and it seems like you'd have a really hard time collecting on a promissary note... Of course, there are lots of ways a buyer can get out of the deal if he wants to without forfeiting his earnest money, so you're probably not giving up something you could actually 'have'.

That said, it does sound like this buyer is cash-strapped, so I'd insist that your agent do an extra-careful review of the buyer's finances before taking your house off the market.

The promissory note needs to be redeemed prior to closing, like within 72 hours after contract acceptance.
A buyer of mine asked for a week to redeem because of stock that needed to be cashed, it didn't take that long, so it's not unusual.
Your agent should make sure you are protected in case the buyer walks arbitrarily!

This is interesting. We're kinda on the other side of it. We have very little cash (hence why we're selling), as it's all tied up in the equity of our house, but excellent credit. So for us to make an offer before our house sells, we'd only be able to offer $500 earnest money at most. I've been concerned if sellers will take our offer seriously. Any offer made would be contingent on the close of our house (and we won't be making any offers until it's in escrow). But once that happened, we'd be putting close to 50% down on the sale and financing the rest.

If I was a seller, I'd wouldn't budge on getting enough earnest money so that the breaking of the contract would cause the buyer to seriously think about what they are doing. 1% is nuts to me. $500 is even worse.

Juliebatt, maybe find out from your bank if you could get an equity loan that you could use for the earnest money when making an offer. $500 would probably not convince a seller to take their home off the market.

In order to give you a decent answer it would be necessary to know whether most buyers in your area buy with little or no money down; we don't know your area--rural, suburban or the price range. All that makes a difference. The fact that this buyer cannot even come up with $500 cash would be my problem.You can ask for a financial set up sheet. Where does he work, is he married, etc. If they won't give you that info, forget it.

yes, that's what is sending up the red flag to me that buyer can't come up with any amount of cash only promissory note BUT he would be able to make the monthly mortgage.
I'm in a suburban area with strong job growth, excellent school system, 5-minutes away to major roads/highways, subway train and located 25 miles from a major city. My home is considered a starter home and in this subdivision are priced in the mid 300's.

Any more feedback?

If the buyer can show that they are preapproved for a loan, I wouldn't worry about it. If they default, it's the lender's problem and not yours.

artamnesia -- unfortunately being pre approved doesn't mean the buyer will make it to closing. It only means that on the surface he can afford the home. I know one person that was pre approved, bought a new house in Colorado, sold their old home in Illinois and had everything on the truck on the way to the new home and closing when they got a call that the financing had fallen through. This was only 2 days before closing. I've been known to take a lower offer for a home if the financing was solid over someone with shaky financing. The original poster does have to worry about taking his/her home off the market for someone with sketchy finances only to have the deal fall through. if the OP is concerned with the sketchy finances, asking for a real earnest money deposit instead of a promissory note upon acceptance of the contract would be the very least he/she should do.

I absolutely would not accept a promissory note as a form of payment. If they default, wouldn't you have to sue them for the money?

Julie - Is your house for sale? If not, I highly recco you get a HE loan for a higher downpayment. I personally would flat out refuse an offer with only $500 deposit. That would indicate to me that you can't afford the home and that getting to closing would be a problem.

If your house is already on the market, you can't take out an HE loan, but you should find a way to have a larger deposit on a home you want to buy.

It really depends on the market and what is normal. Where I live a downpayment is 5 or 10% of the purchase price. Of couse you do not pay it until you are in contract and have had it inspected and worked out any problems. When the offer is first accepted you send 500 to show you are serious.

However, it sounds like there are markets where the ernest money is 1000 total. So what is yours? Also how is the market, is it a complete buyers market so that your house will sit? If that is the case I might accept it (maybe run a credit check on the purchaser, get a FICO score first?) and put a very strict time is of the essence clause? Still does not sit well with me because he is tying up your house (not just for the month but until the contract is either completed or the contract is voided) and he is risking nothing. For you as an indiviudual to enforce the note would be impossible and expensive. While it is true that most sellers never get earnest money, if the contract falls through there is at least an incentive for buyers to release the seller and get their money back

No, at my price range/square footage, it's not a complete buyer's market, because I'm at the starter or entry level price for a home. I've checked the other competition, and anything below the low 300's, the only thing you can get is a condo the size of a closet or a house that is in bad shape that needs another $50,000 to bring it up to livable standards.
My realtor actually got me to agree to list at $15,000 below market so the house will not sit.

Anymore feedbacks regarding the promissory note as earnest money?

I've got the feeling that this guy would have to borrow the money just to get a burger at McDonald's.

Sounds like he doesn't have a pot to p*ss in.

Why not just accept the offer with the right to keep showing the house?
I have to say this is reminiscent of work. Sometimes someone acts really suspicious and I think they're up to no good. I try to get rid of them but they persist. And they turn out legit in the long run.
Try to find out more about this buyer and see if there might be a perfectly logical explanation.

Depends on local MLS rules as to whether this can be done

If it quacks like a duck and walks like a duck, it is usually a duck

A poster replied "why not just accept the offer with the right to keep showing the house?"

How does this contigency work?

You always have the right to keep showing a house until it closes. However you would only be able to accept another offer as a back-up.

Have the buyer make the promisory note out to your real estate agent and then have your agent give you the 1% in cash. See what she says to THAT deal!

LOL... excellent idea, dgmarie! I love it.

What the other posters have mentioned is called a kick out clause. You accept their offer, contingent on earnest money escrowed and all inspection contingencies. You continue to show the home. If another offer comes in, the original buyers have 24 hrs or a specified time to remove all contingencies. If they can not, your contract with them is terminated. You can then move forward with the new buyers.