Earnest money is a deposit paid—often into an escrow account—to show a good-faith intention to complete a transaction—often a transaction for the purchase of real property (real estate).

If the prospective buyer defaults and fails to complete the transaction for the purchase of the real property (fails to close) the earnest money is usually forfeited and delivered to the would-be seller under the terms of the contract or agreement for the sale of the property.

Earnest money is generally not required for a valid contract for the purchase and sale of real property, but is often included to compensate the prospective seller for time and potential missed sales opportunities while the sale was “under contract” with the prospective buyer.

Earnest money may also be referred to as earnest; bargain money; caution money; hand money; or down payment.

In Colorado, earnest money is a deposit made by a buyer to demonstrate their serious intent to purchase real estate. It is typically held in an escrow account during the transaction process. While earnest money is not legally required to make a real estate contract valid, it is a common practice to include it as a sign of good faith. If the buyer fails to follow through with the purchase (fails to close), the earnest money is usually forfeited to the seller, according to the terms outlined in the purchase agreement. This compensates the seller for the time the property was off the market and for any other opportunities they may have missed. The specific conditions under which earnest money may be forfeited or returned are typically detailed in the real estate contract, and Colorado state statutes and case law provide a legal framework for disputes over earnest money. It is important for both buyers and sellers to understand the terms of the contract regarding earnest money and to consult with an attorney if they have questions about their rights and obligations.