Earnest Money - Explained
What is Earnest Money?
Written by Jason Gordon
Updated at September 24th, 2021
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What is Earnest Money?
Earnest money is a payment made in good faith to secure a transaction. This payment is made by buyer to the seller (service provider). It is mostly made in real estate transaction. It is made to ensure that transaction will be completed at some point in the future. If a buyer does not complete the transaction according to the underlying agreement, the earnest money will be forfeited to the seller.
How is Earnest Money Used?
Earnest money provides security for a contract. When buyer pays earnest money it is either retained with seller or held by a third party (escrow agent). The amount of earnest money is deducted from the amount owed at the finalization of the transaction. The amount of earnest money varies depending upon the type of transaction and location. In some countries, it is a percentage of sale price (e.g. 5% or 10%). In some places, the amount of earnest money is fixed. In these places, buyers pay a fixed amount of earnest money at the time of contracting.
Related Topics
- Listing Agreement
- Property Lawyers
- Multiple Listing Service
- Private Mortgage Insurance
- Closing (Property)
- Buying Real Estate as an LLC
Academic Research
An analysis of the price formation process at a HUD auction, Allen, M., & Swisher, J. (2000). Journal of Real Estate Research,20(3), 279-298. This study considers whether auctioned properties sell for different prices than they would bring through private negotiation. It also considers whether the order of sale of the auctioned properties affects observed prices. An Analytical Discussion of the Promise of Sale and Related Subjects, IncludingEarnest Money, Smith, J. D. (1959)..La. L. Rev.,20, 522. Contracts as Commodities: Issues and Approaches in Regard to Commercial Real EstateEarnest Moneyand Option Contracts-A Texas Lawyer's Perspective, Ellis Jr, B. J., & Abramowitz, B. I. (1984).. Mary's LJ,16, 541. Guarantees for contractor's performance and owner's payment in China, Meng, X. (2002). Journal of Construction Engineering and Management,128(3), 232-237. This paper first analyzes the problem of default risk that contractors and owners often face in China, then stresses that establishing a construction contract guarantee system is a necessary and effective measure for solving this problem. Policy choice for establishing a construction contract guarantee system in China is presented in this paper by using the experience of developed countries for reference and taking Chinese domestic circumstances into account. Contractsas options: some evidence from condominium developments, Shilling, J. D., Benjamin, J. D., & Sirmans, C. F. (1985). Real Estate Economics,13(2), 143-152. This paper values the real estate option to purchase contract in a contingent claims framework. The model is an application of the Black and Scholes option pricing model. The Function ofEarnest Moneyin the Civil Law of Sales, Hebert, P. M. (1930). Loy. LJ,11. Contracts as options: some evidence from condominium developments, Shilling, J. D., Benjamin, J. D., & Sirmans, C. F. (1985). Real Estate Economics,13(2), 143-152. This paper values the real estate option to purchase contract in a contingent claims framework. The model is an application of the Black and Scholes option pricing model. The economics of performance margins in futures markets, Kahl, K. H., Rutz, R. D., & Sinquefield, J. C. (1985). Journal of Futures Markets,5(1), 103-112. Earnest money, Dorris, M. (1992). Ploughshares,18(1), 200-211. On How to Distinguish and ApplyEarnest MoneyandDeposit, Shao-hua, C. H. E. N. (2008). Journal of Wuhan Institute of Technology,1, 010. " God's Penny" asEarnest Money: The Historical Meaning ofEarnest Money, Tetsumi, K. A. T. O. (2011).
