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

The purpose of earnest money in a real estate transaction is primarily to serve as a deposit that demonstrates the buyer's commitment to purchasing the property. This money is typically submitted along with an offer to purchase and signals to the seller that the buyer is serious about the transaction. It provides the seller with a level of assurance that the buyer is committed to completing the sale.

When earnest money is deposited, it is generally held in an escrow account and will eventually be applied toward the buyer’s closing costs or down payment. If the transaction goes through, the earnest money is credited to the buyer. If the buyer defaults without a valid reason as outlined in the purchase agreement, the seller may keep the earnest money as compensation for taking the property off the market.

This function establishes the buyer's good faith and can help in negotiating the terms of the sale, as a larger earnest money deposit may make the offer more attractive to the seller.