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White Paper: Earnest Money Trust Accounts

White Paper: Earnest Money Trust Accounts

I. Introduction

Earnest money deposits are involved in almost every real estate transaction. Although not essential to the creation of a valid and binding purchase agreement, it is the rare residential real estate transaction that does not require the buyer to make an earnest money deposit. The earnest money is almost always turned over to the real estate broker who holds the money in trust for the parties to the transaction. Since the Ohio real estate licensing laws place some very definite obligations on the broker with respect to the earnest money deposit, it is the purpose of this paper to discuss generally the law of earnest money and, more specifically, the manner in which the broker should handle the earnest money deposit to comply with the state licensing laws.

II. The Law of Earnest Money

"Earnest money" is nothing more than a deposit of part payment of the purchase price on a sale to be consummated in the future. In the context of a real estate transaction, several courts have defined earnest money as a comparatively small sum of money paid down as an assurance that the party making the offer is acting in earnest and good faith and that "if his being in earnest and good faith fails, it will be forfeited." While the terms of the earnest money deposit should be defined in the purchase agreement, generally the deposit is delivered to the real estate broker at the time the offer is made, and the broker deposits the earnest money in his trust account either upon receipt or upon acceptance of the offer by the Seller, depending upon the terms of the purchase agreement. When the real estate transaction is closed, the earnest money is either returned to the buyer or the buyer is given a credit against the purchase price.

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Revised: March 2009