What main function does earnest money play in a real estate contract?

Earnest money serves an essential role in a real estate transaction as it signifies the buyer's serious intent to purchase the property. By providing this deposit, the buyer demonstrates a good faith gesture to the seller, indicating that they are committed and willing to proceed with the transaction. This amount is typically deposited once a purchase agreement is reached and can help to assure the seller that the buyer is not merely exploring options without proper commitment.

The uniqueness of earnest money lies in its function as a form of security for both parties involved. If the transaction proceeds as planned, the earnest money is usually applied toward the purchase price or closing costs. Conversely, if the buyer fails to follow through on the agreement without a valid reason, the seller may retain the earnest money as compensation for the time and effort lost. This can deter buyers from making frivolous offers and encourages responsible behavior throughout the negotiation process.

In contrast, earnest money is not intended to cover closing costs, facilitate repairs, or guarantee future rental obligations, which are functions associated with different aspects of real estate transactions.