EMD (Earnest Money Deposit)
A good-faith deposit a buyer puts down when signing a purchase contract, held in escrow and credited at closing. It signals serious intent and is at risk if the buyer defaults outside contingencies.
An earnest money deposit (EMD) is the good-faith deposit a buyer puts up when going under contract to buy a property. It tells the seller the buyer is serious — earnest — about closing, and it gives the seller some compensation if the buyer walks away without cause. The EMD is held by a neutral third party (the title company or escrow agent) and credited toward the purchase price at closing.
How much and how it's held
EMD typically runs 1–3% of the purchase price on retail deals, though investor and wholesale contracts often use much smaller, even nominal amounts ($500–$1,000). It's wired or delivered to escrow shortly after the contract is signed — never directly to the seller — and sits there until closing.
When the EMD is at risk
The fate of earnest money depends on the contract's contingencies:
- Buyer closes → EMD is applied to the down payment / purchase price.
- Buyer cancels within a contingency (inspection, financing, appraisal, due-diligence period) → EMD is typically refunded.
- Buyer defaults with no valid contingency → the seller may keep the EMD as liquidated damages.
So earnest money is genuinely at risk only if a buyer backs out for reasons outside the agreed escape hatches.
EMD in wholesaling and investing
For wholesalers and investors, EMD strategy matters:
- Keep it small. Wholesalers negotiate minimal earnest money because they may assign the contract and don't want large cash tied up.
- Protect it with contingencies. A solid inspection or due-diligence period lets you exit and recover the EMD if the deal doesn't pencil or you can't place it with an end buyer.
- Watch hard EMD. Some sellers demand non-refundable ('hard') earnest money to prove commitment — only agree if you're certain of the deal, because that money is gone if you don't close.
EMD vs. down payment vs. option fee
EMD is not the down payment (though it's credited toward it), and it's distinct from a separate option fee some contracts charge for the right to terminate during a defined period. The EMD is the at-risk good-faith money; the down payment is your equity contribution at closing.
Frequently asked questions
How much earnest money should I put down as an investor?
It's negotiable. Retail deals often use 1–3% of price, but investors and wholesalers commonly negotiate small or nominal EMD ($500–$1,000) to limit cash at risk, especially when they may assign the contract. The amount that satisfies the seller without over-committing you is the goal.
Can I get my earnest money back?
Yes, if you cancel within a valid contingency — inspection, financing, appraisal, or a due-diligence period — the EMD is typically refunded. You generally lose it only if you default without a contractual reason. 'Hard' (non-refundable) earnest money is gone regardless, so agree to it only when you're sure.
Is earnest money the same as a down payment?
No. Earnest money is a good-faith deposit made at contract signing and held in escrow; the down payment is your equity contribution at closing. The EMD is credited toward the purchase price (and thus the down payment) when you close, but they're separate concepts.