Contract Deposits
Earnest Money: Custody, Timing and Who Ends Up With It
Deposit deadlines, permitted account types, customary amounts, and the procedure for releasing contested funds are all written into state license law and commission rules, and they differ substantially. Treat any national description of a timeframe as a prompt to look up your own state's rule, not as the rule.
A buyer's deposit does two jobs at once. It signals that the offer is serious, and it becomes a pot of money that somebody will be entitled to if the sale does not close. Licensing exams care mostly about the second job, and about the licensee's handling of the funds in between.
The material below separates the contract question, which decides who keeps the money, from the custody question, which decides where the money sits and how quickly it gets there. Mixing those two up is the single most reliable way to miss an item on this topic.
What the Deposit Is and Is Not
The deposit accompanies or follows an accepted offer and is credited to the buyer at settlement, normally reducing the cash the buyer brings to the table. Until then it belongs to neither party outright; it is held by a third party under the terms the contract sets.
It is not the down payment. The down payment is the buyer's own equity contribution measured against the purchase price and financed amount, and it is determined at settlement. The deposit is an earlier transfer that eventually gets applied against what the buyer owes.
It is also not what makes the agreement enforceable. A sale contract needs consideration, and mutual promises between buyer and seller supply it. Plenty of enforceable contracts exist with no deposit at all, which is a distinction test writers like because candidates assume the opposite.
Amount is a negotiated term rather than a legal requirement. What is customary varies by market and by how competitive the moment is, and a seller can decline an offer whose deposit looks too thin. Do not carry a fixed percentage into an exam item unless the question supplies one.
Custody Rules a Licensee Is Judged Against
Deposit mishandling is a recurring subject of disciplinary action, so it is a recurring subject of exam items. The rules below are about the licensee's conduct, not about who eventually wins the money.
Funds go into a designated trust or escrow account, separate from the brokerage's own money. Depositing them into an operating account is commingling, and it is treated as serious misconduct even if nothing is lost.
Spending or borrowing from the account for any purpose is conversion, a still more serious violation, and it is charged separately from commingling.
The deposit deadline comes from two places at once: the contract's own language and the state rule that tells a broker how soon after receipt the money must be placed. The tighter of the two governs.
Records follow the money. Ledgers by transaction, reconciliations on the state's schedule, and availability for audit without notice are standard expectations.
Who may hold funds is defined by state law. A brokerage, a title or escrow company, or an attorney are the common permitted holders; an individual licensee holding funds personally generally is not.
Release requires authority. Written instructions signed by both parties, an order from a court, or whatever alternative procedure the state authorizes. A holder who simply picks a side is exposed regardless of who was right.
Who Gets the Money When the Sale Dies
Start with the contract, then find the contingency. If the buyer exits through a condition the agreement preserved for them, and exits inside the window the agreement allowed, the deposit goes back. Financing, inspection and valuation conditions are the usual routes, and each of them has a deadline attached.
A buyer who walks away outside those conditions has breached, and the seller's remedy is whatever the contract specifies. Many residential forms treat the deposit as an agreed measure of the seller's loss, which spares the seller having to prove actual damages. Some forms instead preserve broader remedies, and the exam expects you to read the clause rather than assume.
Where the seller is the party who fails to perform, the buyer normally recovers the deposit and may have further claims, including the possibility of compelling the sale itself because each parcel of land is treated as unique.
None of that gets settled by the licensee. When the parties disagree, the money stays put and the dispute moves to the process the state provides: interpleader in court, a commission-supervised procedure, mediation or arbitration under the contract. A licensee's job is to hold, document and stay neutral.
Questions Candidates Miss on This Topic
Can something other than cash serve as the deposit?
Sometimes. A written promise to deliver funds by a stated date is accepted in some states and under some contract forms, and non-cash items are occasionally negotiated. The controlling points are what state law permits and what the parties actually wrote, and a seller is free to insist on cleared funds.
Does the listing broker keep the deposit when a buyer defaults?
Not automatically. Whatever the seller recovers flows from the sale contract, while any share the brokerage receives flows from the listing agreement. Those are separate documents, and a split of forfeited funds only exists if the listing agreement created one.
What happens if the buyer never delivers the promised deposit?
A missed deposit is itself a breach of the contract term requiring it, and most forms let the seller terminate on that basis after whatever notice the form requires. It does not automatically void the agreement, so read the remedy clause instead of assuming the deal evaporates.
Is interest earned on deposits available to keep?
Only under the state's rules. Many jurisdictions require interest-bearing accounts to be set up only with written direction, and some direct interest to a state-run fund. A broker keeping interest without authorization is a familiar discipline fact pattern.
Who is responsible if the account is short at audit?
The broker holding the license the account sits under. Delegating bookkeeping does not move the responsibility, and a shortage is treated as the broker's violation even where an employee created it.