What does earnest money demonstrate in a real estate transaction?

In a real estate transaction, earnest money serves as a demonstration of a buyer's serious intent to purchase a property. This monetary deposit is typically submitted when a buyer makes an offer on a property and is seen as a sign of good faith to the seller. It indicates that the buyer is committed to moving forward with the transaction and is willing to put down a portion of the purchase price to secure the property while negotiations are ongoing.

The amount of earnest money can vary, but it generally ranges from 1% to 3% of the purchase price. If the deal is successfully closed, this money is usually applied toward the buyer's down payment or closing costs. Conversely, if the transaction does not proceed due to conditions outlined in the purchase agreement (such as an unsuccessful inspection), the earnest money is often refundable to the buyer.

By placing earnest money in the transaction, the buyer shows that they are serious about their offer and have the intent to follow through with the purchase, establishing trust and signaling their commitment to the seller. This financial gesture helps facilitate the negotiation process and contributes to the overall seriousness of the buyer's position in the transaction.