Earnest money is a deposit towards the purchase of real estate made by a buyer to demonstrate that he/she is serious (earnest) about wanting to complete the purchase. When a buyer makes an offer to buy residential real estate, he/she generally signs a contract and pays a sum acceptable to the seller by way of earnest money. The amount varies enormously, depending upon local custom and the state of the local market at the time of contract negotiations.

The earnest deposit could be several hundred or even several thousand dollars, but normally no more than 5% of the purchase price. If the buyer defaults without a good reason, as spelled out in the contract, the earnest money becomes payment for damages suffered by sellers and their agents. If the buyer’s contract is not accepted by the seller, the money is returned to the buyer.