What does "earnest money" signify in a real estate transaction?

Earnest money represents a deposit made by a buyer as a show of good faith and serious intent to proceed with the purchase of a property. This financial commitment signals to the seller that the buyer is earnest in their offer and intends to finalize the transaction, which can help strengthen the buyer's position in a competitive market. The earnest money is typically held in an escrow account and can be applied toward the buyer's closing costs or down payment upon the successful completion of the sale. This practice establishes a level of trust between both parties and provides a level of assurance to the seller that the buyer will follow through with their commitment to purchase.

Other options relate to different aspects of the real estate process, such as service fees and property evaluation costs, which do not capture the essence of what earnest money signifies in a transaction. The incorrect option about penalties implies a negative consequence that does not accurately reflect the purpose and nature of earnest money in the buying process.