Earnest money is a deposit paid—often into an escrow account—to show a good-faith intention to complete a transaction—often a transaction for the purchase of real property (real estate).
If the prospective buyer defaults and fails to complete the transaction for the purchase of the real property (fails to close) the earnest money is usually forfeited and delivered to the would-be seller under the terms of the contract or agreement for the sale of the property.
Earnest money is generally not required for a valid contract for the purchase and sale of real property, but is often included to compensate the prospective seller for time and potential missed sales opportunities while the sale was “under contract” with the prospective buyer.
Earnest money may also be referred to as earnest; bargain money; caution money; hand money; or down payment.
In Texas, earnest money is a deposit made by a prospective buyer to demonstrate their serious intent to purchase real estate. This deposit is typically held in an escrow account during the period the property is under contract. While earnest money is not legally required to make a real estate contract valid in Texas, it is a common practice to provide assurance to the seller. If the buyer defaults on the agreement and fails to complete the purchase, the earnest money is usually forfeited to the seller, according to the terms outlined in the purchase agreement. The forfeiture of earnest money serves as compensation for the seller's time and the opportunity cost of having the property off the market. The terms and conditions regarding earnest money, including the amount, the conditions under which it may be forfeited or returned, and other details, are typically specified in the real estate purchase contract. It is important for both buyers and sellers to clearly understand these terms before entering into a contract. An attorney can provide guidance on the implications of earnest money in a real estate transaction and ensure that the contract terms are legally sound and protect the interests of the parties involved.
