Earnest Money: What Realtors Should Know

Introduction

When a buyer makes an offer on a home, they also make a promise — one backed by earnest money. This good-faith deposit shows commitment to the transaction and signals to the seller that the buyer is serious. But while most agents understand the basics, few take the time to explain the nuances of earnest money to their clients. As a Realtor, understanding how earnest money works (and communicating it clearly) can help prevent misunderstandings, delays, and even disputes during escrow.

What Is Earnest Money, and Why It Matters

Earnest money, sometimes called a “good-faith deposit,” is typically 1–3% of the purchase price and is submitted shortly after an offer is accepted. The funds are held in escrow — not by the buyer, seller, or agent — until closing.
For buyers, it represents trust. For sellers, it provides assurance. For you as the Realtor, it’s an opportunity to set expectations early and prevent surprises later.

Example: If a buyer backs out of a deal without a valid contingency, the seller may be entitled to keep the earnest money. But if the deal falls through due to an inspection or financing contingency, those funds are typically returned to the buyer.

Setting the Right Expectations

It’s important for agents to explain both the purpose and the process before an offer is submitted. Here are key talking points you can share with clients:

• How much to offer: Typically 1–3%, but higher deposits can strengthen offers in competitive markets.
• When it’s due: Usually within 1–3 business days of the contract being accepted.
• Who holds it: A neutral third party — usually the escrow company — safeguards the deposit.
• When it’s applied: At closing, the earnest money is credited toward the buyer’s down payment or closing costs.

Realtor Tip: Encourage clients to have funds ready in a liquid account before submitting an offer. Waiting to move money can cause avoidable delays in opening escrow.

Common Earnest Money Pitfalls

Even seasoned agents encounter issues when it comes to earnest money handling. Here are a few red flags to watch for:

1. Late Deposits: Delayed transfers can breach contract timelines.
2. Non-Refundable Deposits: If contingencies aren’t clearly stated, buyers risk losing funds.
3. Disputes After Cancellation: Misunderstandings about contingencies can lead to hold-ups when escrow tries to disburse funds.
4. Incorrect Recipient: Always verify the escrow company’s wire instructions directly with your escrow officer to avoid fraud.

Prosper Preparedness: Educate clients early. Remind them to confirm wire instructions verbally, avoid transferring to personal accounts, and understand their contingencies in writing before releasing funds.

How Escrow Protects Both Parties

One of the most overlooked aspects of earnest money is that escrow acts as the neutral referee. Escrow ensures funds are handled legally, released appropriately, and that all contractual obligations are met before any money moves. This protection works for both buyer and seller — and reinforces why a professional escrow team is so valuable in every transaction.

For Realtors, this partnership is key: escrow professionals can help you clarify deposit timelines, verify funds, and provide written documentation that keeps your transaction compliant and transparent.

Final Thoughts

Earnest money may seem like a small part of the overall transaction, but its impact is huge. It builds trust, keeps timelines on track, and gives everyone peace of mind. By walking your clients through the process — from deposit to disbursement — you’re not just managing a transaction; you’re demonstrating professionalism and protecting your client’s interests.

Realtor Tip: Consider creating a branded “Earnest Money Guide” you can send to buyers as soon as their offer is accepted. It’s a simple touch that adds tremendous value and builds confidence from day one.