Washington State Real Estate Practice Exam

What is the role of earnest money in real estate transactions?

1. To cover closing costs

2. A deposit to demonstrate the buyer's commitment

3. A fee paid to the listing agent

4. A tax related to property transactions

The correct answer is: A deposit to demonstrate the buyer's commitment

In real estate transactions, earnest money plays a critical role as a deposit that demonstrates the buyer's commitment to purchasing the property. This financial amount is typically provided to the seller upon the acceptance of an offer and serves as a sign of good faith that the buyer intends to follow through with the transaction. The earnest money is usually held in an escrow account until the transaction is completed or terminated. If the sale goes through, this amount generally applies toward the buyer's down payment or closing costs. However, if the deal falls through because of contingencies stated in the purchase agreement—like a failed inspection or inability to secure financing—the buyer often gets this money back. By requiring earnest money, sellers can evaluate the seriousness of prospective buyers and reduce the likelihood of having offers from insincere buyers. It helps to secure a level of trust in the transaction framework. The other aspects of the options noted do not accurately represent the function of earnest money. It is not intended to cover closing costs specifically, nor is it considered a fee for the listing agent or a tax associated with property transactions. Instead, its primary purpose is to signify the buyer's intent and commitment to proceed with the purchase.