The Department of Treasury defines earnest money as:
a sum of money given to bind an agreement, such as the sale of real estate, the advance of a loan or some other transaction requiring a deposit. Earnest money is forfeited by the donor if he or she fails to carry out the terms of the contract or agreement.
In Oregon, earnest money is collected at the time the offer is written. Most commonly by check, a personal check is okay, a promissory note may also be used that will be redeemed if the offer is accepted. If a check is taken, it is held pending mutual acceptance and then deposited within 72 hours. The Note is redeemed and deposited within the same 72 hours. It has the same effect but requires more paperwork.
The Oregon Residential Real Estate Agreement includes this verbiage about earnest money.
EARNEST MONEY PAYMENT/REFUND: If (1) Seller does not approve this Agreement; or (2) Seller approves this Agreement but fails to furnish marketable title; or (3) Seller fails to complete this transaction in accordance with this Agreement, or perform any other act as herein provided; or (4) any condition which Buyer has made an express contingency in this Agreement (and has not been otherwise waived) fails through no fault of Buyer, then all earnest money shall be promptly refunded to Buyer. However, acceptance by Buyer of the refund shall not constitute a waiver of other legal remedies available to Buyer. If Seller signs this Agreement and title is marketable; and (1) Buyer has misrepresented Buyer’s financial status; or (2) Buyer’s bank does not pay, when presented, any check given as earnest money; or (3) Buyer fails to redeem, when due, any note given as earnest money; or (4) Buyer fails to complete this transaction in accordance with this Agreement, or perform any other act as herein provided, then all earnest money paid or agreed to be paid shall be paid to Seller either as liquidated damages or as otherwise allowed under Oregon law, and this transaction shall be terminated. It is the intention of the parties that Seller’s sole remedy against Buyer for Buyer’s failure to close this transaction shall be limited to the amount of earnest money paid or agreed to be paid herein.
The section outlines who gets the earnest money and for what reason. In Oregon, earnest money is usually deposited with the escrow/title company. They are the neutral third party and only move money when all parties agree in writing. If the buyer fails to perform and loses their earnest money, they cannot be held liable for any additional damages. If the seller fails to perform and the earnest money is returned to the buyer, the buyer may still sue the seller for further damages or the transfer of the property. If your transaction was to get to this stage, legal council would be a must.
How much earnest money? We’ll discuss that in a post soon.