Earnest money is a deposit paid—often into an escrow account—to show a good-faith intention to complete a transaction—often a transaction for the purchase of real property (real estate).

If the prospective buyer defaults and fails to complete the transaction for the purchase of the real property (fails to close) the earnest money is usually forfeited and delivered to the would-be seller under the terms of the contract or agreement for the sale of the property.

Earnest money is generally not required for a valid contract for the purchase and sale of real property, but is often included to compensate the prospective seller for time and potential missed sales opportunities while the sale was “under contract” with the prospective buyer.

Earnest money may also be referred to as earnest; bargain money; caution money; hand money; or down payment.

In California, earnest money is a deposit made by a prospective buyer into an escrow account to demonstrate their commitment to completing a real estate transaction. It is not legally required for a contract to be valid, but it is commonly used to show good faith and to provide the seller with some security. If the buyer defaults and does not finalize the purchase, the earnest money is typically forfeited according to the terms of the purchase agreement, compensating the seller for the time the property was off the market. The amount and conditions regarding the forfeiture of earnest money are usually stipulated in the purchase agreement. California law requires that all terms of the sale, including the earnest money deposit, be in writing to be enforceable (Statute of Frauds, California Civil Code § 1624). It is important for both buyers and sellers to clearly understand the terms of the earnest money deposit, including under what circumstances it may be refunded or forfeited, as these terms can significantly impact the parties' rights and obligations.