Wisconsin Real Estate Sales Practice Exam

What does the term 'earnest money' refer to in a real estate transaction?

1. A payment made for closing costs

2. A deposit to demonstrate buyer's intent

3. A fee for the real estate agent

4. A tax paid to the government

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

The term 'earnest money' refers specifically to a deposit made by a buyer to demonstrate their serious intent to purchase a property. This money is often included with the offer to purchase and shows the seller that the buyer is committed to following through with the transaction. By providing earnest money, the buyer is essentially putting skin in the game, which can help strengthen their offer in a competitive market. This deposit is typically held in an escrow account and may be applied to the purchase price at closing. If the transaction proceeds successfully to completion, the earnest money generally becomes part of the overall payment for the property. If the deal falls through under certain conditions defined in the purchase agreement, the buyer may be entitled to a refund of this money. This mechanism not only incentivizes buyers to carry out the transaction but also provides a degree of security to sellers that the buyer is genuinely interested and has taken preliminary steps towards closing.