What is the purpose of the earnest money in a real estate transaction?

In a real estate transaction, earnest money serves as a security deposit that demonstrates the buyer's commitment to the purchase. By providing earnest money, the buyer signals their serious intent to follow through with the transaction. This monetary deposit shows the seller that the buyer has a vested interest in the property and is willing to put down a portion of the purchase price to hold the property while the transaction is finalized.

This deposit also plays a crucial role in protecting the seller in case the buyer decides to back out of the agreement without valid cause. If the buyer withdraws from the transaction in a situation not covered by the contract (such as not meeting contingencies), the earnest money may be forfeited to the seller, compensating them for the time and opportunity lost.

The other options do not accurately reflect the function of earnest money. It does not represent the total value of the property nor is it primarily intended for closing costs. Additionally, earnest money is not refundable under all circumstances, as losing the deposit can occur if the buyer fails to comply with the terms of the contract.