Affiliate Broker Tennessee (TN PSI) National Practice Exam `

Why is Debra mistaken in thinking she can spend the $4,500 earnest money from an offer on her house?

1. The earnest money is a refund.

2. The earnest money belongs to the buyer.

3. The earnest money will be held in escrow.

4. The earnest money can be withdrawn immediately.

The correct answer is: The earnest money will be held in escrow.

Debra's misunderstanding revolves around the nature and purpose of earnest money in a real estate transaction. Earnest money is typically a deposit made by a buyer to demonstrate their intent to purchase the property. This money is held in escrow, meaning it is entrusted to a third party, such as a real estate broker or an attorney, until the transaction closes or is terminated. The crucial aspect of earnest money being held in escrow means that it is not available for either party to spend at will. Instead, this money is essentially a security deposit that assures the seller that the buyer is serious about the purchase. If the transaction goes through, the earnest money usually gets applied to the buyer's closing costs or down payment. However, if the deal falls apart under certain conditions that are outlined in the purchase agreement, the earnest money may be refundable to the buyer. In short, Debra is mistaken in thinking she can use the $4,500 earnest money because it is being held in escrow as a form of security for the transaction, not directly available for spending.