Earnest money

Key Takeaways

• Earnest money is the buyer's good-faith deposit, and it is credited toward the purchase price at closing rather than charged on top of it.
• Earnest money is not the down payment. The deposit is a small part of the price paid early; the down payment is the whole cash share the buyer brings instead of borrowing.
• In Washington, a licensee who receives earnest money must deposit it in the firm's trust account the next banking day after receipt, unless the purchase and sale agreement calls for deferred deposit or for delivery to someone else (RCW 18.85.285).
• A disputed deposit cannot be paid out on the broker's judgment. Washington requires the designated broker to notify every claiming party of the intended disbursement first (RCW 18.85.285).

What It Means

Earnest money is the deposit a buyer delivers with an offer or shortly after the offer is accepted. It has one job, which is to give the seller something concrete to hold while the property comes off the market. A seller who stops taking offers is giving up other buyers, and the deposit is the buyer's answer to the question of how serious this offer really is.

The amount is negotiable and is usually a small percentage of the price. A larger deposit makes an offer look stronger in a competitive market, which is one reason buyers sometimes raise the deposit instead of raising the price.

Earnest money is credited, not spent. At closing it is applied to the purchase price, so a buyer who deposits $10,000 on a $500,000 home still owes $490,000 and not $510,000. Between acceptance and closing the money sits with a neutral holder, normally the firm's Trust Account or an Escrow account, and it is released only as the Purchase And Sale Agreement directs. Nobody gets to move it on a phone call.

How It Works in Washington

In Washington, earnest money becomes trust money the moment a licensee touches it. RCW 18.85.285 treats funds received by a licensee in a real estate transaction as trust funds, requires them to be held in a separate trust account at a Washington depository, and requires deposit the next banking day following receipt unless the purchase and sale agreement provides for deferred deposit or for delivery to another party such as the closing agent. Firms that hold earnest money keep pooled interest-bearing trust accounts, with the net interest directed to the state housing trust fund and real estate education rather than to the firm.

When the agreement sends the deposit somewhere else, WAC 308-124E-110 tells the licensee to deliver it to the party the purchase and sale agreement designates, to obtain a dated receipt from whoever ends up holding it, and to keep that receipt in the transaction file. The Designated Broker carries ultimate responsibility for delivery of the funds, so a check left in a desk drawer over a weekend is a firm compliance problem, not a personal oversight.

Disputes are handled by rule rather than by instinct. Under RCW 18.85.285, when more than one party claims the trust funds, the designated broker must notify all claiming parties of the intended disbursement before paying anyone. If the agreement terminates according to its own terms before closing, WAC 308-124E-110 allows disbursement as the agreement provides without a separate written release.

Example

Priya offers $565,000 on a Tacoma house and hands the listing firm a $15,000 earnest money check at 6:00 p.m. on a Friday. The next banking day is Monday, so the check goes into the firm's pooled trust account Monday morning. The receipt goes in the transaction file.

The agreement gives Priya a 30 day financing contingency. On day 28 her lender denies the loan, she delivers written notice inside the window, and the agreement terminates according to its own terms. Because the termination is by the agreement's own terms, the firm disburses the $15,000 back to Priya as the agreement provides, with no separate written release needed.

Had the loan cleared instead, the $15,000 would have shown up on Priya's settlement statement as a credit, cutting her cash to close from $128,000 down to $113,000. Same money, different destination, decided entirely by the contract.

Common Mistakes and Exam Traps

• The deposit clock runs from receipt of the funds, not from mutual acceptance. A check collected with the offer starts the deadline even before the seller has signed anything.
• A broker facing two parties who both claim the same deposit cannot simply pay the one who seems right. Notice to every claiming party comes first.
• Forfeiture is not automatic when a buyer walks away. What the seller may keep depends on the remedy the contract selects, such as a liquidated damages provision.
• Money held by a real estate firm and money held by an escrow agent follow different Washington statutes, so the correct citation depends on who is holding the deposit.