What is the role of earnest money in property transactions?

Earnest money plays a crucial role in property transactions, primarily serving to demonstrate the buyer's serious intent to purchase the property. When a buyer offers earnest money, it shows sellers that the buyer is committed to moving forward with the transaction. This deposit functions as a form of security for the seller, giving them confidence that the potential buyer is genuine and motivated.

Typically, earnest money will be held in an escrow account until the transaction closes. If the deal goes through, the earnest money is often applied toward the buyer’s down payment or closing costs. If the deal falls apart due to contingencies that are part of the agreement, the earnest money may be returned to the buyer. However, if the buyer backs out without a valid reason outlined in the contract, the seller might be entitled to keep the earnest money as compensation for the time and opportunity lost.

This function underscores why earnest money is essential in real estate transactions, differentiating serious buyers from those who may not be fully committed. The other options provided don't accurately reflect this primary purpose of earnest funds in the transaction process.