Earnest money, as the name suggests, is an amount paid with the intention of expressing sincerity of intent. Otherwise known as earnest payment or good faith deposit, it is money which is usually paid to facilitate a transaction, usually involving a piece of real estate. This is given at the beginning, simply for the buyer to show the seller how serious he is in his desire to purchase the property.
Once a buyer signifies his intent to purchase a piece of property, he can discuss an acceptable amount with the seller, after which a contract may be drafted and signed. The amount may be dependent on the general market condition during the discussion, or it may be determined by recognized local custom. There is a tendency for the amount to be higher in times of high demand.
Once the buyer and seller reach an agreement and the earnest money is paid, the amount usually goes to an escrow account. It may also be held by a title company, depending on the rules in the territory where the property is to be purchased. The buyer should receive a full refund of the earnest payment if the deal is not closed by the broker. However, if the buyer violates contract agreements or decides to withdraw from the transaction, the amount is no longer refundable. Since more protection is afforded the seller in such a setup, it is highly beneficial for the seller to secure the biggest earnest payment that he possibly can. However, a certain level of security is also given to the buyer in the sense that the seller is not supposed to offer the property to other buyers unless the earnest money has been returned or the buyer violated the terms of the contract.