Real Estate Investing Basics

Earnest Money: What It Is, Why It’s Important — and How to Protect Your Deposit

Expertise: Landlording & Rental Properties, Personal Development, Real Estate News & Commentary, Real Estate Investing Basics, Business Management, Flipping Houses, Mortgages & Creative Financing, Real Estate Deal Analysis & Advice, Real Estate Wholesaling, Personal Finance, Real Estate Marketing, AskBP
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(This post on earnest money is based on a section from The Book on Rental Property Investing. If you are reading this post, you really should probably pick up a copy of that book.)

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When you join the mob, they likely will ask you to kill someone, just to make sure are serious and not wasting their time.

In real estate, people also hate to have their time wasted. Lucky for us, though, murder isn’t required to prove our sincerity.

Instead, we rely on the earnest money deposit.

The earnest money deposit, also known as a good faith deposit or simply earnest money, is money provided by the buyer when an offer is submitted as a way of showing the seriousness of the offer. This deposit is essentially the buyer saying, “Look, I really want to buy this property, and I’m putting my money where my mouth is.”

The earnest money is pledged, and should the buyer not fulfill his end of the contract, the seller can keep the money. So yes, you can lose your earnest money! However, there are certain conditions that allow you to back out without losing it, which we’ll talk about.

But first, let’s talk about how much the earnest money deposit is.

How Much Is the Earnest Money Deposit?

The amount of earnest money supplied depends greatly on the price of the property and the person from whom you are buying the property. For example, the earnest money on a $40,000 house will probably be far less than the earnest money on a $1,000,000 apartment complex!

Although there is no hard and fast rule that governs the amount required, most earnest money deposits tend to be 1% to 2% of the purchase price.

Because the seller gets to keep the earnest money if the buyer backs out without a legitimate reason (which we’ll talk about in a moment), the higher the earnest money deposit, the better the chance that your offer will be accepted.

That said, when dealing with motivated sellers, the earnest money becomes much less “normal” because the seller generally doesn’t know or care much about the amount. Some investors simply make the earnest money $1.00, and most private sellers don’t seem to notice or mind.


When Is the Earnest Money Deposit Given?

One of the most common questions I am asked on our weekly BiggerPockets Webinar is, “How do you make so many offers? Where do you come up with all that earnest money?”

You see, this question is based on a false belief that earnest money is given when the offer is made. However, in most cases, the earnest money is not given until AFTER the offer has been accepted. So, I can make 20 offers in a month, but if only two of those get accepted, then I only have to pay earnest money on two of them.

Related: The One Thing All Experienced Investors Know to Be True (And All Newbies Will Learn!)

For more on my offer strategy, don’t miss How (and Why) I Offer on Properties BEFORE I Ever Step Foot in the House.

Who Holds On to the Earnest Money Deposit?

The earnest money should not be given directly to the seller (unless it’s something small, like a dollar).

Instead, this money is usually held by a third party, most likely the title company or attorney who is handling the closing. This ensures that the rules that govern what happens to the earnest money are followed. This is most commonly done when the contract has been accepted and signed by both parties, not before.

If you are working with a real estate agent, your agent will mostly likely tell you when and where to drop off the earnest money check.

What Happens to the Earnest Money?

So what exactly is the earnest money used for? What ultimately happens to it? There are three possible scenarios that could play out, depending on how the deal is done (or not done).

  1. If the sale goes through, the earnest money becomes part of the cash the buyer would be required to bring to closing. For example, if your down payment plus closing costs came to $50,000 but you gave a $2,000 earnest money deposit, you would only be required to bring $48,000 to the closing table, as directed by the title company or attorney who closes the sale.
  2. If the sale does not go through and the buyer does not have a legal reason to back out, then the deposit is forfeited to the seller, and the seller receives the deposit.
  3. If the sale does not go through and the buyer does have a legal reason to back out, the deposit is returned to the buyer.

So what are these “legal reasons” I have mentioned? They are known as “contingencies.”

earnest money

Real Estate Contingencies

Most contracts, real estate or otherwise, contain certain provisions that outline conditions in which the contract could be terminated. These provisions are known as “contingencies.” In other words, the property sale is contingent on some specifically listed things.

These are legal loopholes that allow you to not follow through on your contract, should one of those contingencies happen to occur.

Technically, you could have contingencies for anything you can think of. Yes, that means you could write up a contingency in the contract that says, “This contract is contingent on the grass being colored purple” or “This contract is contingent on my hair falling out before closing.” If you were to include those and the grass was NOT colored purple or your hair did not fall out, you could cancel the contract and back out with no repercussions. Of course, these are absurd examples meant only to illustrate what a contingency is.

So what kind of contingencies should you put in your offer?

First, understand that the more contingencies you put in your offer, the more leery a seller will be to accept it.

Think about it: If someone offered to buy your home but only if 50 little contingencies happened, would you feel comfortable accepting? Probably not!

However, at the same time, contingencies are often necessary to protect yourself from things you couldn’t anticipate — like knowing how much to offer, knowing which contingencies to include in the contract depends on the deal itself and the person you are submitting the offer to. If I was competing with numerous other people for a property, I might include far fewer contingencies than I would if I were offering on a deal with no competition.

But let me share the two most common contingencies you’ll likely encounter:

1. The Inspection Contingency

You can only learn so much about a property by walking through it on a quick tour. As I’ll talk about more later in this book, it’s pretty important to do a deep inspection of a property before buying it, using a professional inspector to find every imperfection they can about the property.

An inspection contingency, therefore, gives you the ability to inspect everything about the property within a certain timeframe and back out if you find something that you didn’t expect. On residential homes, a 10-day inspection contingency is most common. This means that after 10 days, the contingency is no longer applicable.

Inspection contingencies are very common in real estate contracts, but some experienced investors do choose to waive this contingency, opting instead to take the risk that nothing unforeseen will come up in the inspection. If it does and they have to back out because of it, they could lose their earnest money. Other investors, including me, often designate much shorter inspection periods (often as brief as three days), knowing that this will still allow time to get in and get the property looked at in detail, but it will look better than those who need ten days. (Of course, you need to know that you can get it inspected in this timeframe. Often, professional inspectors are booked out several days in advance and take a couple of days to get the report to you.)


Related: Buying a House: The Ultimate Guide to Purchasing Your First Property

2. The Financing Contingency

What would happen if you tried to buy a property but at the last minute, you found out that your financing had fallen through? As disappointing as that might be, you might also lose your earnest money if you don’t have the financing contingency in place. The financing contingency allows a buyer to back out and to keep their earnest money should the buyer not be able to obtain a loan.

Of course, if you are paying cash for a house, you will have no need for a financing contingency, and your offer will likely look much stronger to the seller. Some investors choose to avoid using the financing contingency, even if they are using a loan. This can help make their offer stand out, because the seller knows that either the deal will close or they’ll get the earnest money, no matter what happens.

Of course, if you choose to waive the financing contingency but still plan to use a loan, this can increase your risk of losing that earnest money should something go wrong with your financing.

So, what other questions do you have about the earnest money deposit?

Share your questions or comments below and let’s talk!

Oh — and don’t forget to sign up for this week’s webinar!

Brandon Turner is an active real estate investor, entrepreneur, writer, and co-host of the BiggerPockets Podcast. He began buying rental properties and flipping houses at age 21, discovering he didn’t need to work 40 years at a corporate job to have “the good life.” Today, with nearly 100 rental units and dozens of rehabs under his belt, he continues to invest in real estate while also showing others the power, and impact, of financial freedom. His writings have been featured on,,, Money Magazine, and numerous other publications across the web and in print media. He is the author of The Book on Investing in Real Estate with No (and Low) Money Down, The Book on Rental Property Investing, and co-author of The Book on Managing Rental Properties, which he wrote alongside his wife, Heather, and How to Invest in Real Estate, which he wrote alongside Joshua Dorkin. A life-long adventurer, Brandon (along with Heather and daughter Rosie) splits his time between his home in Washington State and various destinations around the globe.

    James Wise Real Estate Broker from Cleveland, OH
    Replied over 3 years ago
    Great article Brandon. One thing I would like to ad would be that investors must not over simplify the process of getting their earnest money back. It is not always as black and white, there are some very gray scenarios that could occur. The following statements from the article are in essence how it should work in theory but not always in actual practice. If the sale does not go through and the buyer does not have a legal reason to back out, then the deposit is forfeited to the seller, and the seller receives the deposit. If the sale does not go through and the buyer does have a legal reason to back out, the deposit is returned to the buyer. For a real estate broker or title company to release the earnest money that is held in their trust account both the buyer and the seller need to sign off on the release and specify who it is to be released to. Sometimes a buyer backs out for a reason that they consider justified by the contingencies in the contract but the seller does not feel the same. Things in the inspection report can sometimes be viewed differently from either side. The buyer may choose to cancel a deal after a crack in the foundation wall is flagged by the general home inspector as dangerous. The seller on the other hand may argue that the crack was clear and apparent. Usually purchase agreements with inspection contingencies are written in a way that only things that are not already clear and apparent are cause to cancel the contract. Who is right in this scenario as both buyer and seller feel they should get the earnest money? If they cannot come to an agreement on their own and sign a mutual release the real estate broker or title company could not legally release the earnest money until one of the parties sued and the judge ruled who would get the money. Buyers need to understand that getting back your earnest money, even if a buyer followed the contract to the letter may not always be a simple process. Sometimes the cost to litigate may be even more than the earnest money was in the first place. In short, if someone wants to write an offer and put up earnest money they should be very serious about closing the deal. The time to kick the tires or think things over is PRIOR to writing an offer and putting up a deposit as getting it back might not be a black and white process.
    Dan White
    Replied over 3 years ago
    Hi Brandon, Just wanted to know how you knew so much about the mob initiation requirements? I heard that they like to keep this kind of thing quiet. When you make a real estate offer do you commonly say that you intend to make an offer they can’t refuse?. This is a wholesaling technique that may bear some merit. You have so many great ideas and advice just not sure of your sources.
    Brandon Turner Investor from Maui, HI
    Replied over 3 years ago
    How about we meet tonight at midnight around the ‘ol abandoned train station. There is something I need to share with you there… come alone.
    Kimberly H. Residential Real Estate Broker from Chicago Suburbs, Illinois
    Replied over 3 years ago
    If the seller goes MIA, such as in a short sale, you might not be getting your EM back. In those cases we’ve added clauses to the contract to cover those situations.
    Cheryl Crockett Real Estate Investor from Baltimore, MD
    Replied over 3 years ago
    Here’s a beginner scenario that could happen: What do you do when you get more offers accepted than you have earnest money to fund?
    Lydia T. Wholesaler from Dallas, Texas
    Replied over 3 years ago
    Thats a good problem to have Cheryl!