What does the term “earnest money” signify in a real estate context?

In real estate, “earnest money” refers to a deposit made by a buyer to demonstrate their serious intent to purchase a property. This deposit is typically included with the purchase offer and serves as a good faith gesture. It assures the seller that the buyer is committed to the transaction and is not just making an inquiry without any real intention to follow through.

Should the transaction proceed as planned, the earnest money is usually applied towards the buyer's down payment or closing costs. If the deal falls through due to circumstances specified in the purchase agreement, the earnest money may be returned to the buyer, depending on the terms established. This concept is critical in real estate negotiations as it helps to facilitate trust between the parties involved and signals a buyer's seriousness to potential sellers.