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When you make an offer on a property, the seller is taking a risk. Accepting your offer usually means taking the home off the market, turning away other buyers, and waiting weeks for closing. Sellers want some assurance that you will follow through.
That assurance is the good faith deposit, often called earnest money. It is a sum of money you put down with your offer to show the seller you are serious. This guide walks through how the deposit works, how much to put down, when you get it back, and what it means if you are buying properties as an investor.
What the Deposit Is and Why Sellers Expect One
The deposit is money you submit along with your purchase offer, usually as a check or wire. It does not go to the seller directly. Instead, it is held by a neutral third party, such as a title company, attorney, or broker, in an escrow account until the deal closes or is canceled.
This setup protects both sides. The seller knows you have real money committed to the deal. You know the seller cannot spend your money before the sale is complete. If the deal closes as planned, the funds are credited back to you at closing.
Key takeaway: The deposit is not an extra fee. It is your own money, set aside as proof of commitment, and it counts toward what you owe at closing.
There is no law requiring a deposit. In practice, though, most sellers will not take an offer seriously without one, especially when they have other options.
Good Faith Deposit vs Earnest Money
In most real estate transactions, these two terms mean exactly the same thing. Agents tend to say "earnest money deposit," escrow officers often say "good faith deposit," and purchase contracts may use either. If you are buying a home or an investment property, you can treat them as interchangeable. We cover the investor angle in more depth in our guide to whether investors should offer earnest money.
There is one exception worth knowing. Some lenders ask for their own deposit when you apply for a mortgage. That money covers upfront loan costs like the appraisal, credit check, and underwriting.
It is paid to the lender rather than into escrow, and it is usually not refundable if you walk away from the loan. If a lender requests a deposit, ask exactly what it covers and whether any portion comes back to you at closing.
So before you hand over any money, check where it is going. A deposit held in escrow is protected by the terms of your contract. A deposit paid to a lender is typically spent on loan processing costs.
How the Four Common Deposits Compare
Buyers juggle several similar-sounding payments during a purchase. Here is how they differ.
| Aspect | Earnest Money (Escrow) | Lender Deposit | Down Payment | Security Deposit |
|---|---|---|---|---|
| Purpose | Shows the seller you are committed | Covers upfront loan costs | Your equity portion of the price | Covers damage in a rental |
| Who holds it | Neutral third party (escrow) | The lender | Paid at closing | The landlord |
| Typical size | 1–3% of purchase price | A few hundred dollars | 3–20% of purchase price | 1–2 months of rent |
| Refundable? | Yes, if a contingency applies | Usually not | No, applied to the price | Yes, minus any damage |
| Where it goes at closing | Credited to your down payment or closing costs | Spent on appraisal and underwriting | Paid to the seller | Returned when the lease ends |
How Much Should You Put Down?
There is no set amount. The deposit is negotiable, and the right number depends on your market and the property.
- Typical range: Most buyers put down 1 to 2 percent of the purchase price. On a $300,000 property, that is $3,000 to $6,000.
- Competitive markets: In a hot market with multiple offers, buyers sometimes go to 5 percent or more to stand out.
- Slow markets: When sellers have fewer options, smaller deposits are common and often accepted.
Off-market deals work differently. When you negotiate directly with a motivated seller, the deposit is whatever the two of you agree on. Wholesalers regularly secure contracts with deposits of $100 to $500, and sometimes far less. One DealMachine member turned $10 of earnest money into a $25,000 payday.
What this allows you to do is control a property with very little cash at risk, as long as the seller agrees to the terms.
When You Get the Money Back (and When You Do Not)
Refunds come down to one thing: the contingencies written into your purchase agreement. A contingency is a condition that must be met for the deal to move forward. The most common ones are:
- Inspection contingency: You can cancel if the inspection reveals problems you are not willing to accept.
- Financing contingency: You can cancel if your loan falls through despite a good faith effort to secure it.
- Appraisal contingency: You can cancel if the property appraises below the agreed price.
If you cancel for a reason covered by a contingency, your deposit comes back to you. If you back out for a reason your contract does not cover, the seller can typically keep the money as compensation for the time the property sat off the market, according to the National Association of Realtors.
Two more details help ensure you are protected. First, releasing the funds requires both parties to agree in writing, so a disputed deposit can sit in escrow until the disagreement is resolved. Second, some sales are exceptions to the normal rules: foreclosure and bank-owned properties often require deposits that are non-refundable from the start. Read those terms carefully before you commit.
What This Means for Real Estate Investors
If you are investing in off-market properties, the deposit is more than a formality. It is a trust-building tool. Homeowners who have never sold a property before may be skeptical of an investor's offer. A deposit, even a modest one, shows them you intend to perform.
For wholesalers, the deposit is part of the deal structure itself. A small deposit secures the contract, and the contract is what you assign to your end buyer. Keeping deposits small protects your downside if a deal falls apart.
If you are new to this model, our full guide to wholesale real estate walks through it step by step. The same logic applies to creative structures like subject-to financing, where deposit terms are negotiated directly with the seller.
Making Your Next Offer with Confidence
Once you understand how the deposit works, it stops being a source of anxiety and becomes a negotiating tool. You know the money sits safely in escrow. You know contingencies control whether it comes back. And you know the amount is negotiable based on your market and the deal in front of you.
From here, the process is straightforward: write contingencies into every offer, keep your deposit proportional to the deal, and never hand money directly to a seller or anyone else outside of escrow.