earnest money

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Earnest money

Money given to a seller by a buyer to demonstrate the buyer's good faith. If the deal falls through, the deposit is usually forfeited.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Earnest Money

A small amount of money that a seller requires a potential buyer to deposit before a transaction is completed. Earnest money ensures that the potential buyer is serious about the transaction and will be likely to complete it when the time comes. If the buyer subsequently withdraws from the deal, he/she usually forfeits the earnest money. It is common in real estate and securities (where it is usually called a good faith deposit). Earnest money reduces the risk to the seller. It is also called a binder.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

earnest money

A deposit of money made by the purchaser of real estate. It can serve the following purposes:

• It shows evidence of economic resources and the probable ability to proceed to closing.

• It provides hostage value because of the usual contract provision that seller may retain the earnest money in the event of default.

• It may allow enforcement of a contract that might be defective on purely technical grounds. For example, some states allow enforcement of an oral real estate contract when there has been partial performance by the payment of earnest money. This occurs often, as when a buyer submits a written offer for property and an earnest money check. The seller makes a verbal counteroffer, and the buyer verbally accepts. The seller deposits the check. No one ever thinks to prepare a new written contract for signatures. Standing alone, this is an oral contract that is unenforceable under the Statute of Frauds.

The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.