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An earnest payment is a specific form of security deposit made in some major transactions such as real estate dealings or required by some official Procurement processes to demonstrate that the applicant is serious and willing to demonstrate an earnest of good faith about wanting to complete the transaction.
In ancient times, the earnest payment was called variously an earnest penny, Aries penny, or God's silver (in Latin Argentum Dei ). It was either money or a valuable coin or token given to bind a bargain, notably for the purchase or hiring of a servant. According to Black's Law Dictionary (sixth ed.), Et cepit de praedicto Henrico tres denarios de Argento Dei prae manibus And he took it from the aforesaid Henry [sealed by a] silver three pence [piece] handed over [in the sight of] God'',
A related term is luck money, which relates to a token given back to the buyer by the seller on the completion of a deal, for luck. In Germany, knives are still sometimes packaged with a specially minted "gluecks pfennig" coin or Euro cent - presumably to indicate the buyer and seller are friends.
A potential buyer of property of high value such as residential real estate generally signs a contract and pays a sum acceptable to the seller by way of earnest money. The amount varies enormously, depending upon local custom and the state of the local market at the time of contract negotiations.
In very competitive markets 'the earnest' may represent a substantial portion of the completion cost. In the USA, between about 2000 and 2005 real estate purchases earnest money deposits reached about 5% of the sales price. In other situations, a significant token payment (equivalent to around one week or one month's salary) may be acceptable. (In the USA during 2008 typically $500 or $1000 was acceptable)
When the transaction is settled then the deposit is applied to the buyer's portion of the remaining costs. If the offer is rejected, the earnest money is usually returned, since no binding contract has been entered into. Laws vary as to what happens with the deposit should the buyer fail to perform on the contract.
- "Earnest Money Deposits". Homebuying.about.com. 2013-08-08. Retrieved 2013-10-19.
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