Earnest money deposit is the buyer's good-faith payment, held in escrow, that signals a serious commitment to buy a commercial property. It is credited toward the purchase price at closing, refundable if the buyer terminates within a contingency, and typically forfeited to the seller as liquidated damages if the buyer defaults.
What Is an Earnest Money Deposit in Commercial Real Estate?
An earnest money deposit in commercial real estate is a sum the buyer places in escrow when the purchase and sale agreement is signed, to show it intends to close. According to Commercial Real Estate Loans, it demonstrates the buyer's commitment and gives the seller recourse if the buyer walks away without a valid contractual reason.
The deposit is held by a neutral escrow agent, not the seller. It is credited against the purchase price at closing, so a serious buyer is not paying extra, only advancing part of the price. During the contingency period it is generally refundable if the buyer terminates for a permitted reason. After contingencies expire, it usually goes "hard," meaning non-refundable and at risk if the buyer fails to close.
Earnest money attribute | Treatment |
Who holds it | A neutral escrow agent or title company, not the seller |
At closing | Credited toward the purchase price |
During contingency period | Generally refundable if the buyer terminates for a permitted reason |
After contingencies expire | Typically non-refundable, at risk if the buyer defaults |
On buyer default | Often retained by the seller as liquidated damages |
Per Duckfund, the national average earnest money runs 1% to 5% of the purchase price, and can range from 1% to 10% depending on the market and asset.
Why the Earnest Money Deposit Matters
The earnest money deposit matters because it is the buyer's skin in the game: it is the money that makes the commitment credible and the money the buyer loses if it defaults. For the seller, it is often the sole remedy for a buyer who walks, so its size and its refund conditions decide who carries the risk of a failed close.
The deposit works as liquidated damages. Per Cowherd PLLC, a well-drafted contract provides that if the buyer defaults, the seller may keep the earnest money as its damages, without proving actual loss. That is enforceable only when actual damages are hard to measure and the amount is a reasonable approximation of the seller's loss, so an unreasonably large deposit can be struck down.
The quotable point for an operator: earnest money is the price of certainty. A larger deposit and an earlier hard date make a buyer's offer more credible to a seller, but they move the risk of a failed close onto the buyer.
Example
A buyer offers on a retail property at a $4,000,000 purchase price with a 3% earnest money deposit and a 30-day contingency period. The deposit is 0.03 multiplied by $4,000,000, which equals $120,000, wired to escrow when the PSA is signed.
Scenario | Timing | Outcome for the $120,000 |
Buyer closes | At closing | Credited toward the $4,000,000 price; buyer wires the $3,880,000 balance |
Buyer terminates in contingency | Within 30 days, permitted reason | Refunded in full to the buyer |
Buyer defaults after contingency | After day 30, no valid reason | Seller retains the $120,000 as liquidated damages |
At closing the buyer owes the $4,000,000 price less the $120,000 already in escrow, so it wires the $3,880,000 balance. If instead the buyer terminates on day 20 during due diligence for a permitted reason, escrow returns the $120,000. If the buyer simply fails to close on day 45 with no contingency remaining, the seller typically keeps the $120,000.
Variations and Edge Cases
An earnest money deposit is not a single fixed amount or rule: its size, its refundability, and its release depend on the market, the contract, and the parties. A hot-market seller may demand far more than the national average, and a deposit that has gone hard behaves differently from one still inside a contingency. The table covers common variants.
Variant | Treatment |
Hot-market or trophy asset | Per Duckfund, sellers may ask for 5%, 10%, or even 15% to reserve the property |
Deposit refundable | Buyer can recover it by terminating within a live contingency |
Deposit gone hard | Non-refundable; at risk even if the buyer later finds a problem |
Staged or increasing deposit | An initial deposit, then an additional amount when due diligence expires |
Escrow dispute | Per Sinai Law Firm, the escrow agent needs a signed mutual release; absent one, the funds stay put |
The most common mistake is letting the deposit go hard without confirming the contingencies are truly satisfied. Once the deposit is non-refundable, a problem discovered late no longer entitles the buyer to a refund.
Earnest Money Deposit vs Down Payment
Earnest money deposit is often confused with the down payment, and both are buyer funds tied to a purchase, but they differ in purpose and timing. An earnest money deposit is a good-faith sum placed in escrow at contract signing to secure the deal. A down payment is the buyer's equity contribution to the purchase price, paid at closing alongside loan proceeds.
Earnest money comes early and shows commitment; it is credited toward the price at closing, so it is effectively an advance on the down payment, not an amount on top of it. The down payment is the full equity the buyer brings at closing. Earnest money can be forfeited on default; the down payment is only funded once the deal actually closes.
Frequently Asked Questions
How much is earnest money for a commercial property?Per Duckfund, earnest money for commercial property typically runs 1% to 5% of the purchase price nationally and can range from 1% to 10% depending on the market and asset. For trophy assets in hot markets, sellers may ask for 5%, 10%, or even 15% to reserve the property.
Is earnest money refundable in commercial real estate?Earnest money is generally refundable if the buyer terminates within a live contingency, such as during the due diligence period for a permitted reason. Once the contingencies expire and the deposit goes hard, it is typically non-refundable and can be retained by the seller as liquidated damages if the buyer defaults.
Who holds the earnest money deposit?A neutral escrow agent or title company holds the earnest money deposit, not the seller. Per Sinai Law Firm, the escrow agent cannot decide a dispute on its own and generally needs a signed mutual release from both parties before the funds can be released.
Related Terms
Purchase and Sale Agreement
Contingency Period
Letter of Intent
Due Diligence
Estoppel Certificate