What is and what is the purpose of the earnest money agreement

In a real estate sales process, there are a series of steps and documents that intervene and guarantee that the transaction is carried out correctly. One of these documents is the earnest money agreement, which, once the buyer and seller agree on the sale of a property, initially formalises that commitment.

What is the earnest money

The earnest money agreement establishes a preliminary agreement between the owner and the buyer. It is signed once there is agreement on the price and the basic conditions, but before the public deed. It is not mandatory, but it is recommended, as it is a binding pact that sets the basic conditions of the future sale: price, deadlines, identification of the property, consequences in case of non-compliance by either party, etc.

This document acts as a reservation of the property for the buyer and ensures that the seller of the property, if the buyer does not comply with what has been agreed, can keep financial compensation.

When this document is signed, the buyer delivers a sum of money, usually 10% of the sale price. However, this can vary depending on the agreement reached, although it is usually an amount sufficient to guarantee the completion of the transaction. This money will be deducted from the final price when the deed is signed.

Types of earnest money agreement

1. Penitential earnest agreement (art. 1454 of the Civil Code)

This type is the most common in real estate transactions. It allows the buyer of the property to withdraw from the contract, but they are penalised by losing the earnest money if the transaction is not completed. If it is the seller who withdraws from the transaction, they must return double the amount.

This type of earnest money agreement provides a secure framework but offers flexibility to the parties.

2. Confirmatory earnest money

These are an advance payment of the price, with no right to withdraw. If one of the parties does not comply, the other can demand fulfilment or contract termination, as well as possible compensation for damages.

3. Penal earnest money

They establish a financial penalty if one of the parties fails to comply. They are used when one wants to reinforce the commitment with clear consequences.

Additionally, it is possible to sign an earnest money agreement subject to mortgage approval. In this case, if the bank ultimately does not approve the financing, the contract becomes void and no financial penalty is applied. This condition must be explicitly stated in the earnest money document to ensure the security of both parties.

What is its function?

In a property sale, it serves several functions:

• Formalises the commitment between buyer and seller before the deed.

• Provides legal security and clarity in the process.

• Establishes specific deadlines and conditions.

• Allows the property to be reserved while documents are prepared and preliminary procedures are completed.

Even though it may seem like a simple commitment document, the earnest money contract has important legal effects. Proper professional advice ensures that the text correctly reflects the will of both parties and is adapted to the particularities of the transaction.