How does earnest money affect a real estate transaction?

Earnest money plays a critical role in real estate transactions by acting as a financial commitment from the buyer to the seller. When a buyer makes an offer on a property, they often include earnest money as part of that offer, demonstrating their serious intent to purchase. This deposit shows the seller that the buyer is committed to proceeding with the transaction.

If the buyer decides to back out of the deal without a valid reason specified in the contract, they may forfeit this earnest money to the seller as a form of compensation for taking the property off the market. Thus, earnest money serves not only as a demonstration of good faith but also as a protection for the seller in the event the buyer fails to follow through on the purchase.

This mechanism encourages buyers to follow through on their agreements while providing sellers with some reassurance against potential loss due to deal cancellations.