What is the purpose of "earnest money" in real estate?

The purpose of "earnest money" in real estate is to serve as a deposit that indicates the buyer's serious intent to proceed with the purchase of a property. By providing earnest money, buyers demonstrate their commitment to the transaction, which can help reassure sellers that they are indeed interested in completing the sale. This upfront payment can also act as a form of security for the seller, compensating them in the event that the buyer backs out of the deal without a valid reason.

Earnest money is typically held in an escrow account until the transaction is completed. If the deal goes through, the earnest money is often applied toward the buyer's down payment or closing costs. However, if the deal falls through due to the buyer's fault, the seller may retain the earnest money as compensation for the time and resources invested in the transaction.

Other options like using earnest money for closing costs, listing fees, or as a tax do not align with its primary purpose, which centers around showing the buyer's intent and securing the seller's confidence in the transaction.