The term earnest money isn't that common anywhere but in the real estate industry. That's why many potential home buyers, when they make an offer on a house, are thrown off-guard when asked how much earnest money is going to accompany the offer. When you think about it in terms of placing a deposit down on the home you want to purchase, it's not quite as confusing. Yet, not knowing the ins and outs of earnest money can lead to a potentially confusing situation.

Earnest money is just what it says: a financial pledge from the buyer to fulfill the terms of the contract offer presented to the seller "in earnest."

At the time of closing, this earnest money is returned to the buyer or credited against the selling price. If the transaction does not close, the money is returned to the buyer as long as the failure to close was due to no fault of the buyer.

If failure to close is with the buyer, though, the money is then generally forfeited to the seller as a way of compensating the seller for the loss of time the property was off the market.

Earnest money deposits are involved in nearly every real estate transaction. Although not essential to the creation of a valid and binding purchase agreement, it is the rare residential real estate transaction that does not require the buyer to make an earnest money deposit.

Why is this? Simple -- the earnest money deposit demonstrates to the seller that the buyer is quite serious about his or her offer. Although the amount of deposit is usually not dictated, it is usually enough to motivate the buyer to take whatever measures are outlined in the contract in the time frame specified.

One way you can help the home buying transaction go smoothly is to be aware that an earnest money deposit will be asked for and be prepared for it. Don't be surprised at contract negotiation time and then provide only part of the sum or a promise to "get the check to you soon." Your REALTOR® cannot indicate on the contract that he or she has received the earnest money deposit when, in fact, he or she has not.

As previously mentioned, an earnest money deposit is not mandated by law. But the administration of the earnest money deposit does fall under state regulatory scrutiny to protect the consumer.

By law, between the time the earnest money is given to the REALTOR® with the offer-to-purchase contract and the closing of the transaction, it is to be kept on deposit in a broker's non-interest bearing trust account.

Generally, earnest money must be deposited in this account within a reasonable time after the receipt of the offer. It is recommended that this deposit be made within 24 to 48 hours of receipt.

However, the purchase contract used by members of the Dayton Area Board of REALTORS® clearly states that the earnest money will be deposited "promptly after acceptance of this offer or returned to purchaser upon request if this offer is not accepted." The broker can wait until the offer is accepted to deposit the earnest money within a reasonable time from acceptance of the offer.

Remember that your REALTOR® serves only as a "caretaker" of the money. Should any dispute arise between the two parties to the transaction as to who should get the money in the event the property does not close, the broker must keep the money on deposit until the dispute is resolved.

What if a buyer is unable to go through with a purchase agreement due to being turned down for a loan, for example, and the seller refuses to sign the earnest money release form? Unfortunately, these kinds of disputes are often resolved in court. The buyer would need to file in small claims court (depending on the amount of the earnest money) in order to have a judge tell the broker who should get the money. Unless both the buyer and seller agree on who gets the earnest money, the broker must await a court order before releasing the deposit to either party.

In the vast majority of cases, though, earnest money is collected, the process continues smoothly and the deposit is returned as indicated in the contract.

Nevertheless, it is easy to see the importance of earnest money to the real estate transaction. In the same sense, it is easy to see why it is important to work with someone qualified and experienced during such transactions.