What is the purpose of earnest money in a real estate transaction?

The purpose of earnest money in a real estate transaction is to demonstrate the buyer's serious intentions to proceed with the purchase. When a buyer submits earnest money, often a percentage of the property's price, it signals to the seller that the buyer is committed and has a genuine interest in completing the transaction. This upfront payment acts as a good faith deposit, reinforcing the buyer's intention while providing the seller with some assurance that the buyer is not likely to back out frivolously.

This commitment can be crucial in competitive markets, where multiple offers may be placed on a property. In many cases, the earnest money is held in escrow and later applied toward the down payment or closing costs if the transaction proceeds as planned. However, if the buyer decides to withdraw from the agreement for reasons not covered in the purchase contract, the seller may have the right to keep the earnest money as compensation for the time the property was off the market and the effort of negotiating the sale.