What is the purpose of earnest money in a real estate transaction?

The purpose of earnest money in a real estate transaction is to demonstrate the buyer's commitment to the purchase. By putting down earnest money, the buyer indicates their serious intent to follow through with the transaction, thereby showing the seller that they are not just casually considering the property but are genuinely interested in completing the purchase. This act of placing earnest money, which is typically a percentage of the purchase price, serves as a form of security for the seller. If the buyer fails to proceed with the transaction without a valid reason as per the purchase agreement, the seller may have the right to retain the earnest money as compensation for taking the property off the market.

This distinguishes earnest money from other potential uses such as covering closing costs, paying agent commissions, or funding remodeling expenses, which do not directly relate to the primary function of establishing buyer intent in the purchase process.