Earnest money is a deposit a buyer puts down after a purchase agreement is signed, to signal they're serious about the deal. It's held by a neutral third party — usually a title company, escrow agent, or brokerage — until closing, at which point it's typically applied toward the buyer's down payment or closing costs. It is not a fee paid to the seller; it stays in escrow and is only released according to the terms the contract spells out.
How Much Is Typical
There's no fixed legal amount — it's negotiated as part of the offer. In many residential markets, buyers offer somewhere in the range of 1% to 3% of the purchase price, though local custom, deal competitiveness, and the seller's expectations all move that number. In a competitive market, a larger earnest money deposit can make an offer more attractive, since it signals the buyer is less likely to walk away over minor issues. In cash or investor deals, the deposit is sometimes a flat negotiated number rather than a percentage.
What Happens to It
- Deal closes: the earnest money is credited toward the buyer's down payment and closing costs at settlement.
- Buyer backs out for a reason covered by a contingency (financing falls through, the inspection reveals a dealbreaker, the appraisal comes in low, and the contract has a matching contingency clause) — the deposit is typically returned to the buyer.
- Buyer backs out without a contract-covered reason — the seller can often keep the earnest money as compensation for taking the property off the market and for the time and opportunity cost lost.
- Seller backs out or breaches — the buyer generally gets the earnest money back, and depending on the contract and local law, may have other remedies as well.
Exactly what triggers forfeiture versus refund is defined entirely by the contingencies written into the purchase contract — this is not standardized, so read the specific contract rather than assuming.
Why It Matters to Investors
For flippers and wholesalers, earnest money is a real risk line item, not a formality. If you put a property under contract with the intent to assign or flip it and the deal falls apart before you have a buyer lined up, you can lose that deposit if you don't have a contingency to exit cleanly. Many investor contracts use inspection contingencies or "due diligence" periods specifically to preserve the ability to walk away without forfeiting the deposit while still locking up the property during that window.
What to Watch Out For
- Where the money actually sits. Earnest money should go to a licensed, neutral third party (title company, attorney, or brokerage escrow account) — never directly to the seller.
- Contingency wording. Vague contingency language creates disputes over whether a buyer is entitled to a refund. Specific deadlines and clear conditions protect both sides.
- Deadlines to remove contingencies. Missing a contingency deadline can convert a refundable deposit into a non-refundable one even if you later find a legitimate reason to back out.
- Disputed deposits. If buyer and seller disagree about who's entitled to the earnest money, it can sit frozen in escrow until both parties agree or a court resolves it — plan for that possibility rather than assuming a quick release.
Frequently Asked Questions
Is earnest money the same as a down payment?
No. Earnest money is a good-faith deposit paid at contract signing; the down payment is paid at closing. If the deal closes, the earnest money is usually credited toward the down payment, but they're not the same thing.
Who holds earnest money?
A neutral third party — typically a title company, escrow agent, or real estate brokerage's trust account — not the seller directly.
Can I lose my earnest money?
Yes, if you back out of the deal for a reason not covered by a contingency in your contract, or if you miss a contingency deadline. This is why reviewing contingency terms before signing matters.
Is earnest money required?
It's not legally required in every transaction, but sellers commonly expect it as proof of a serious offer, and an offer with no earnest money is often viewed as weaker.