What it means
Signing a purchase agreement takes a property or business off the market, and the seller carries that cost if the buyer later disappears. Earnest money compensates for that risk by giving the buyer something real to lose.
The deposit is not the same as the down payment, although it eventually becomes part of it. Earnest money is paid soon after the offer is accepted, while the balance of the deposit is paid at completion.
Whether the buyer gets the money back depends on the contingencies written into the contract. Typical conditions cover finance approval, a satisfactory survey and a clean title search, and a buyer who withdraws because one of those fails normally recovers the deposit in full.
Amounts vary with the market and the asset. Residential deals commonly sit between 1% and 3% of the price, while competitive markets and business acquisitions can push the figure considerably higher.
The escrow arrangement is what makes the deposit safe for both sides. Because a neutral party holds the funds and releases them only on agreed terms, neither buyer nor seller can quietly appropriate the money if the deal turns sour.
Deposits can also be structured rather than paid in one lump. Staged instalments released as each condition is cleared let a buyer show commitment early while keeping less cash at risk until the survey, finance and title work are complete.
In practice
Real-world examples.
Example
A dental practice owner offers $620,000 for a retail unit and lodges $12,400 as earnest money with a solicitor. When the finance contingency fails because the lender declines the application, the deposit is returned in full.
Example
Two bidders chase the same warehouse, and one strengthens their offer by putting up 5% earnest money instead of the usual 2%, with a shorter inspection window. The seller accepts the lower headline price because the commitment looks far more certain.
Example
A buyer acquiring a small logistics business pays $40,000 into escrow on signing heads of terms. The deposit is credited against the price at completion, and the agreement sets out precisely which due diligence findings would allow it to be refunded.
Formula
Calculation
Earnest money = purchase price x agreed deposit percentage
Cash due at completion = total deposit required - earnest money already paid
A buyer agrees to purchase a commercial unit for $850,000. The contract requires 2% earnest money on acceptance, and the lender requires a total deposit of 20% of the price.
Earnest money: 2% x $850,000 = $17,000, paid into escrow within three days of acceptance.
Total deposit required: 20% x $850,000 = $170,000.
Mortgage amount: $850,000 - $170,000 = $680,000.
Cash still due at completion: $170,000 - $17,000 = $153,000, plus legal fees and taxes on top.
If the survey uncovers structural problems and the buyer withdraws under the survey contingency, the full $17,000 is returned. If the buyer simply changes their mind after all contingencies have expired, the seller typically keeps the $17,000.Case study
Seen in the real world.
Pellow Rise Holdings is a fictional property investor invented for this illustrative scenario. It offered $850,000 for a commercial unit and paid $17,000 of earnest money into escrow, with a total deposit requirement of $170,000 and a $680,000 mortgage behind it.
The survey found subsidence at one corner of the building. Because the contract contained a survey contingency with a clearly defined deadline, Pellow Rise served notice inside the window and the escrow agent returned the $17,000 in full.
On its next purchase the illustrative buyer went further and negotiated a staged deposit: a smaller initial amount, with a second instalment released only once the survey and title checks were complete. The seller accepted, because the staged structure still demonstrated genuine intent while keeping less of the buyer's cash at risk.
Watch out
Common mistakes.
- Paying earnest money directly to the seller instead of into escrow, which leaves the buyer with no neutral party holding the funds if a dispute arises.
- Confusing earnest money with the down payment, when the deposit is only the first slice of the cash eventually required at completion.
- Letting a contingency deadline pass without acting, which can convert a refundable deposit into a non-refundable one overnight.
Questions
People also ask.
How much earnest money is normal?
It commonly runs between 1% and 3% of the purchase price, though competitive markets and business acquisitions often demand more.
Is earnest money refundable?
It is refundable when the buyer withdraws under a valid contingency within the stated deadline, and generally forfeited when they withdraw for reasons the contract does not cover.
What happens to the deposit at completion?
It is credited against the purchase price, so the buyer simply pays the remaining balance rather than the full amount again.
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