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The cash deposit (including initial and additional deposits) paid by the prospective buyer of real property as evidence of good-faith intention to complete the transaction; called bargain money, caution money, hand money, or a binder in some states. The amount of earnest money is negotiable between the parties, and its primary purpose is to serve as a source of payment of damages should the buyer default.

Earnest money is not essential to make a purchase agreement binding if the buyer’s and seller’s exchange of mutual promises of performance (that is, the buyer’s promise to purchase and the seller’s promise to sell at a specified price and terms) constitutes the consideration for the contract. Thought should be given to placing the money in an interest-bearing account for the buyer’s benefit, which can be done by the parties agreeing in writing to place it with a neutral third party such as an escrow company.

The deposit, or earnest money, may be held by the listing broker, the buyers’ broker, or a neutral third party at the time the sales contract is signed. The broker’s authority to hold this money on behalf of the seller should be specifically set forth in the listing, because such authority is not implied in law. The broker may never commingle this money with the broker’s own general funds. Only with the knowledge and consent of both parties may the money be disbursed.
Exactly who owns the earnest money once it is put on deposit is uncertain. Until the offer is accepted, the money is the buyer’s. The seller is not entitled to it until the transaction is complete. When the transaction is consummated, the earnest money is credited toward the down payment.

Once the seller accepts the offer, however, the buyer may not get the money back. If the seller defaults, the broker should check with the buyer before returning the earnest money. The buyer may not want the earnest money returned directly to the seller if the buyer wishes to sue the seller for specific performance.
This uncertain nature of earnest money deposits makes it absolutely necessary that such funds be properly protected pending final decision on how they are to be disbursed. (See
Dearborn Real Estate Education
This "Word of the day" is excerpted from The Language of Real Estate, 6th Edition by John Reilly (published by Dearborn Real Estate Education, 2006 copyright). To purchase the complete book, with over 2800 key terms and definitions, or to browse through Dearborn's hundreds of other professional real estate titles, including Real Estate Technology Guide by Klein, Barnett, Reilly, click here.