Earnest Money When Selling to a Cash Buyer: What's Normal and What's a Red Flag

What earnest money is

Earnest money, also called a good faith deposit, is money the buyer puts down to show they intend to close.^[2] If the sale closes, it's usually applied toward the buyer's costs at closing.^[2]

How much is typical

The National Association of REALTORS® says earnest money is often around 3% of the purchase price, or a rounded number like $5,000, and that the amount depends on the market and the seller's request.^[1]

With cash buyers, the deposit is often the only money they have at risk before closing. An Arizona real estate law firm lists little earnest money, often never deposited with a title company, among the signs of a wholesaler contract.^[3] NAR's consumer guide notes that deposits typically range from 1% to 10% of the price, and that no law requires one, so the amount is something you negotiate.^[2]

Who should hold it

The deposit goes into an escrow account, which holds the money for both sides and releases it only when the contract's terms are met.^[2] In practice that's usually a title or escrow company, or an attorney, named in the contract.

• Good sign: the contract names a title company or attorney as escrow holder, and you get written confirmation the deposit arrived.
• Red flag: the buyer holds the deposit themselves, the contract doesn't say who holds it, or the deposit never actually reaches the title company.^[3]

What happens if the buyer backs out

Whether the buyer gets their deposit back depends on the contract. If the buyer cancels under a contingency the contract gives them, such as an inspection period, the deposit is generally refunded.^[2] If they walk away for a reason the contract doesn't protect, such as missing a deadline, the seller may be entitled to keep it.^[2]

This is why the deposit amount matters so much with investors. Many cash buyers purchase as-is with no inspection period, but if the deposit is tiny, walking away (or threatening to, days before closing) costs them almost nothing. If the contract does include an inspection or due diligence period, a buyer can usually cancel without penalty during that window.^[4]

How to protect yourself

1. Ask for a meaningful deposit and write the amount and deadline into the contract.
2. Make sure a title company or attorney holds it, and confirm in writing that it was received.
3. Ask for the deposit to become non-refundable quickly, for example once any inspection period ends or a set number of days after signing.
4. Read what happens to the deposit if the buyer cancels, and after which date it stops being refundable.