What is the purpose of earnest money in real estate transactions?

Earnest money serves as a deposit that demonstrates the buyer's commitment to purchasing a property. This financial gesture shows the seller that the buyer is serious about following through with the transaction. By putting down earnest money, the buyer essentially indicates their intent to purchase and assures the seller that they will not back out of the agreement without valid reason.

This commitment is significant in real estate transactions because it builds trust between the buyer and seller. Should the buyer default on the contract without a justified cause, the seller may have the right to retain the earnest money as compensation for the time and opportunity lost. If the transaction proceeds to closing, earnest money is typically applied toward the buyer’s down payment or closing costs, further evidencing the buyer's investment in the deal.

The other options do not capture the essence of earnest money. It is not primarily a method for paying closing costs, as that role is filled by various funds collected during the closing process. There is also no direct correlation between earnest money and securing an exclusive representation agreement, nor is it related to hiring moving services, which are entirely separate concerns in the home buying process.