Earnest Money: What Buyers Should Know

Why Am I Giving Money to the Seller?

Writing and presenting real estate offers has evolved significantly over the years. The number of forms and pages in an offer has increased dramatically, the methods used to present offers have become less personal, and digital tools have transformed the way we conduct transactions. However, one aspect that has remained largely unchanged is earnest money.

As a buyer making an offer on real estate, it is customary to include a sum of earnest money—or a promise of it upon offer acceptance. Also known as a "good faith deposit," earnest money signals to the seller that you are serious about purchasing the property. Essentially, it serves as a financial commitment: the seller holds this money until closing, and in the event that the deal falls through, they may be entitled to keep it.

You might be thinking, "Jon, you're crazy! Why would I let the seller hold my money and keep it if the deal doesn’t close?" Keep reading—I’ll explain.

Where Does Earnest Money Go?

First and foremost, you don’t actually give the money directly to the seller. Instead, it is held in a trust account, typically managed by the listing brokerage, the selling brokerage, or sometimes an attorney. These real estate trust accounts are highly regulated by the State of Iowa and are subject to periodic audits, ensuring that your funds remain secure. If you’re interested in the details, you can read Iowa Code 193E, Chapter 13.

How Can You Protect Your Earnest Money?

Your offer should include contingencies—such as a home inspection, appraisal, financing, title work, and a closing date—to safeguard your earnest money. If the transaction is canceled due to one of these contingencies, the seller is obligated to return your deposit. A well-crafted offer will include these protections, minimizing the risk of losing your earnest money.

However, you could lose your earnest money if you decide to walk away from the deal without a contractual reason. In such cases, the listing brokerage would release the funds to the seller.

Is Earnest Money Required?

While there is no rule requiring earnest money, an offer without it is likely to be rejected. From a seller’s perspective, earnest money acts as the glue that holds the deal together. When an offer is accepted, the seller takes their property off the market in good faith, expecting the buyer to follow through. Since real estate transactions often take 30 to 60 days to close, a buyer backing out late in the process can cause significant delays and financial setbacks for the seller.

How Much Earnest Money Should You Offer?

There are no strict rules about how much earnest money to include. A good starting point is 1% of the purchase price, though I recommend offering at least $1,000. However, in competitive markets, offering more earnest money can strengthen your offer. In multiple-offer situations, if two offers are otherwise equal, the one with a higher earnest deposit may win. A larger deposit signals financial strength and commitment, increasing the seller’s confidence in your ability to close the deal. I’ve had clients offer as much as $50,000 in earnest money—that kind of commitment gets a seller’s attention!

Conclusion

Now that you understand the role of earnest money, you can work with your agent to craft a competitive offer with the best chance of acceptance. I wish you success in your home-buying journey!

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Norwalk IA Real Estate – Jon Niemeyer, Broker Associate/REALTOR® at EXIT Realty and Associates. I list and sell real estate in Central Iowa including Norwalk, Des Moines, West Des Moines, Cumming, Indianola, Carlisle, Waukee, Urbandale, Grimes, Clive, Johnston, Ankeny, Altoona, and Pleasant Hill in the Counties of Warren, Polk, Dallas, and Madison. Call Jon Niemeyer at 515-490-4675.