Where’s the Consideration?
Neither earnest money nor the purchase price is technically the "consideration" in the eyes of contract law, though both are closely tied to it. In a real estate contract (which is a bilateral contract),
- consideration is the exchange of mutual promises -
Buyer's consideration: The promise to pay money and complete the purchase.
Seller's consideration: The promise to transfer the title/deed of the real estate to the buyer.
What is the Purchase Price?
The purchase price is the total agreed-upon value or the substantive financial obligation the buyer promises to pay at closing. It defines the scale of the bargain, and the buyer's promise to pay that price is part of the legal consideration.
What is Earnest Money?
Earnest money is a good-faith deposit (usually 1% to 3% of the price) put into an escrow account to show the seller the buyer is serious. Earnest money is not legally required for a real estate contract to be valid. If a buyer offers $0 in earnest money, the contract is still valid and binding as long as there is an exchange of promises (buyer promises to pay the price, seller promises to convey the property). At
closing, the earnest money isn't an extra fee; it is credited directly toward the buyer's down payment or closing costs.
The Final Word on Consideration
The confusion surrounding consideration in real estate contracts comes from mistaking the money involved in a transaction for the legal obligation that makes the transaction binding.
Earnest money demonstrates good faith. The purchase price establishes the financial terms of the deal. But neither should be confused with the underlying legal principle of consideration: the bargained-for exchange of promises between buyer and seller.
The buyer promises to pay. The seller promises to convey the property. Those mutual commitments are what supply the consideration.
The takeaway? A buyer can put down $50,000 in earnest money and still have no binding contract if the other essential elements are missing. Conversely, a buyer can put down absolutely nothing and still enter into a legally enforceable purchase agreement.
Consideration isn't about how much money changes hands. It's about what each party legally commits to give in exchange for what they receive.