Earnest Money Deposit
Definition
Earnest money is a deposit made by the buyer at the time of the offer or shortly after to demonstrate good faith and serious intent to purchase the property. It is also called a good faith deposit.
Example
A buyer offers $500,000 for a home and includes a $10,000 earnest money deposit. The deposit is held in the listing broker's escrow account. At closing, the $10,000 is credited toward the buyer's purchase price. If the buyer backs out without cause, the seller may retain the deposit.
Exam Tip
Remember that earnest money is NOT required for a valid contract — this is a common exam trick. The consideration in a purchase agreement is the mutual promises, not the earnest money. Also know that brokers must deposit earnest money into an escrow account promptly and cannot commingle it with personal or business funds.
Related Contracts Terms
Purchase Agreement / Sales Contract
A purchase agreement is a legally binding contract between a buyer and seller that outlines the terms and conditions for the sale of real property. It is also commonly called a sales contract, purchase and sale agreement, or earnest money agreement.
Offer and Acceptance
Offer and acceptance is the process by which one party proposes specific terms for a contract and the other party agrees to those exact terms, creating mutual assent. This mutual agreement, also called a meeting of the minds, is an essential element of every valid contract.
Counteroffer
A counteroffer is a response to an original offer that changes one or more terms of the offer, effectively rejecting the original offer and creating a new offer. The party who makes the counteroffer becomes the new offeror.
Consideration
Consideration is something of value exchanged between parties to a contract, making the agreement legally binding. It can be money, a promise to act, a promise to refrain from acting, or anything else of value.
Contingencies
Contingencies are conditions written into a real estate contract that must be met before the transaction can close. If a contingency is not satisfied, the buyer can typically cancel the contract without penalty.
Inspection Contingency
An inspection contingency gives the buyer the right to have the property professionally inspected within a specified time frame and to negotiate repairs or cancel the contract based on the findings.
Frequently Asked Questions
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