It's back. $1 million, $2 million, $3 million, $4 million—the re-appearance of non-refundable deposits in the multifamily apartment deal space, and the capital stacks being thrown at sellers, seems to indicate a ramp-up in the transactional market. Primarily used as a surety-of-close mechanism, non-refundable, non-due diligence deposits are still a buyer-driven phenomenon, and typically signify froth in competitive markets.

“It’s really an indication of how hot a market is,” says Matt Masinter, senior vice president of acquisitions for Chicago-based Waterton Residential, which just acquired 592 units through its purchase of three Class A multifamily properties in Dallas from Inland American Communities. “Typically, you’ll see non-refundables appear at a regional level and then go national, depending on asset class. You’ll tend to see them a lot on higher-quality assets with a lot of competitive bids and a decent amount of comfort among buyers who are okay with the risk level of newly built assets.”

Waterton will make earnest money non-refundable deposits with a 30-day due diligence covenant upon execution of a contract, but does not make pre-emptive deposits on bids, and with a $500 million discretionary acquisitions fund behind the firm, Masinter doesn’t think they have to. “It’s primarily a way that buyers with less equity try to get the attention of the seller and convince them that they are for real,” Masinter says.

While 30-day earnest money contracts typically run about 1 percent plus or minus 250 basis points depending on the size of the asset, the composition of the capital stack, and other deal levers and variables, straight non-refundables often sit in the 10 percent range. “On a $50 million deal you might see a buyer put down a $5 million deposit,” says David Lynd, president and chief operations officer of San Antonio, Texas-based The Lynd Co., which just acquired 945 units across three properties in Tamarac, Miami, and Jacksonville, Fla., via a $49 million purchase of distressed notes. “The more competitive the market is, the more you see non-refundable deposits, and the higher they get.”

Non-refundable deposits are also common among distressed assets, Lynd says, where the entirety of due diligence typically needs to occur in advance of a deal anyway. “It’s a reflection of the competition for assets and the amount of capital in the market. Non-refundables were really popular back in 2007, and you’ve seen them come back after the recession as the market ebbs and flows.”