An earnest payment is a specific form of security deposit made in some major transactions such as real estate dealings or required by some official procurement processes to demonstrate that the applicant is serious and willing to demonstrate an earnest of good faith about wanting to complete the transaction.
In ancient times, the earnest payment was called variously an earnest penny, Arles penny, or God’s silver (in Latin Argentum Dei). It was either money or a valuable coin or token given to bind a bargain, notably for the purchase or hiring of a servant. According to Black’s Law Dictionary (sixth ed.), Et cepit de praedicto Henrico tres denarios de Argento Dei prae manibus (“And he took it from the aforesaid Henry [sealed by a] silver three pence [piece] handed over [in the sight of] God”).
A potential buyer of property of high value such as residential real estate generally signs a contract and pays a sum acceptable to the seller by way of earnest money. The amount varies enormously, depending upon local custom and the state of the local market at the time of contract negotiations.
In very competitive markets ‘the earnest’ may represent a substantial portion of the completion cost. In the USA, between about 2000 and 2005 real estate purchase earnest money deposits reached about 5% of the sales price. In other situations, a significant token payment (equivalent to around one week or one month’s salary) may be acceptable. (In the USA during 2008 typically $500 or $1000 was acceptable)
If the seller accepts the offer, the earnest money is held in trust or escrow.
These funds may be held directly by the real estate broker (as in the State of New York) or by a settlement or title company (as in states like California, Florida, and Texas).
When the transaction is settled then the deposit is applied to the buyer’s portion of the remaining costs. If the offer is rejected, the earnest money is usually returned, since no binding contract has been entered into. Laws vary as to what happens with the deposit should the buyer fail to perform on the contract.
- ^“Arles penny”. Webster’s Revised Unabridged Dictionary. Retrieved 2014-07-11.
- ^“Earnest Money Deposits”. Homebuying.about.com. 2013-08-08. Retrieved 2013-10-19.
- ^“Earnest Money Definition, Examples, Cases, Processes”. Legal Dictionary. 2015-02-07. Retrieved 2016-05-25.
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.