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Earnest money in real estate refers to the deposit of funds from a prospective property buyer as a gesture, or evidence, of good faith that the transaction would be closed.
The term earnest money has many aliases and can also be referred to as bargain money, hand money, caution money, etc.
The amount deposited seldom exceeds 10% of the purchase price and when closing proceeds, it is credited towards the down payment.
At a point in time, earnest money was a common practice in real estate transactions, but is not as widespread today.
It serves more than just an early partial down payment.
- Serves as proof that a buyer has the financial means to complete the purchase
- Serves as evidence to court (if required) that a transaction was in the works
- Gives a seller some from of compensation (damages) in the event that buyer fails to close
The party who keeps this money is usually the real estate agent. He would hold the money and act on the agreed terms of the buyer and seller on how the cash funds should be managed.
This money will then be deposited either in a trust account or escrow account with very specific instructions on the release terms. Commingle is not allowed.
Should the transaction fail to materialize, proper care must be taken by the agent in determining where the earnest money goes. This is especially when the two parties are in conflict with who the funds should be released to.
Is the money the buyer’s or seller’s?
In such cases, brokers must check with their legal team on the proper way to proceed.