A couple in Tucson called me on a Tuesday morning, four days after their buyer stopped responding. They’d gone the FSBO route, signed a handwritten agreement, accepted a deposit as a personal check, and held it in their own bank account. No title company, no attorney, no escrow. When the deal collapsed, their buyer demanded the money back, they refused, and suddenly a simple home sale turned into a dispute that cost both parties more in legal fees than the deposit itself was worth. The whole mess was avoidable. Every bit of it.

FSBO transactions, meaning homes sold directly by the owner without a listing agent, made up just 5% of all U.S. home sales in 2025 according to NAR’s 2025 Profile of Home Buyers and Sellers. That’s a record low. And yet, every week, sellers attempt them without fully understanding how earnest money works in a transaction where no real estate broker is managing the paperwork. The gap in knowledge is expensive.

Earnest Money in a for Sale by Owner Transaction

A while back, I helped an out-of-state heir sell a property in Boise, Idaho. Her father had passed, she’d just accepted a job transfer to Atlanta, and she had five weeks to be out of the picture entirely. The estate attorney had prepared a basic purchase agreement, but nobody had addressed who would hold the buyer’s deposit. The garage was still packed with her father’s woodworking equipment, the buyer wanted an inspection, and we had two parties who’d never met trying to trust each other with thousands of dollars. Getting a title company involved on day one changed everything, because you need a neutral third party holding that deposit before any real cooperation can happen between strangers. The process moved cleanly after that.

The situation taught me that FSBO transactions aren’t riskier because of the sellers or buyers involved. They’re riskier because the guardrails agents and brokers normally provide simply aren’t there by default. Without a real estate brokerage holding the deposit in a regulated escrow account, somebody has to make a deliberate decision to create that same protection. Most people don’t know to ask.

What Is Earnest Money in Real Estate?

Good-faith money is real money, not a formality. Earnest money, also called a good faith deposit, is an upfront payment that goes toward the home’s eventual sale price and shows the seller that the buyer is serious about completing the purchase. Think of it as skin in the game. The buyer proves they’re committed; the seller feels confident enough to stop showing the property and start preparing to close.

Earnest money is NOT the same as a down payment, which is the money you put toward the home’s purchase price. A lot of buyers mix these two up and it costs them clarity at the closing table. When a deal closes, the deposit gets credited toward the total amount owed at settlement. Should the sale go through, the deposit is applied toward your down payment or closing costs. So in a successful transaction, you’re not handing over extra money; you’re pre-paying a portion of what you already agreed to pay.

Where things get murky in a for-sale-by-owner deal is that no one has automatically been assigned to manage this money. With an agent-assisted sale, the real estate brokerage typically holds the deposit in a regulated escrow account from day one. Remove the agents and brokers from the picture, and both buyer and seller need to solve that problem themselves before signing anything else.

Do You Always Have to Pay Earnest Money?

Legally, no. There are no laws requiring an earnest money deposit to be attached to a home offer. It is a common practice, though, particularly in competitive markets and when a buyer’s down payment is less than 20% of the purchase value.

Skipping the deposit in a FSBO transaction sends a message you probably don’t intend to send. Skipping earnest money comes with risks: your offer may appear less serious to sellers, potentially putting you at a disadvantage, especially in competitive markets. For sellers, accepting an offer without a deposit means you’ve taken your home off the market with nothing to show for it if the buyer walks. This is a real cost, not just an inconvenience.

The national median home value sits around $429,300 as of June 2026, according to NAR data reported by St. Louis REALTORS®. At those price points, even a modest deposit represents real leverage. A buyer who has $4,000 or $8,000 sitting in escrow is far less likely to disappear without warning. One pattern I keep seeing with FSBO sellers is that they feel awkward requesting a deposit because they don’t want to seem distrustful. Reluctance costs them negotiating power before the deal even starts, which is the worst time to give any of it away.

How Much Earnest Money Should You Pay?

Sellers sometimes accept the first number a buyer suggests, not realizing there’s a standard range. Then the deal falls apart and they realize that number was too low to sting.

Earnest money deposits are usually 1% to 3% of a home’s purchase price. In a competitive market where buyers are fighting over listings, deposits sometimes run higher. In slower markets, a lower rate may be sufficient. In hot markets with multiple offers, a higher earnest money deposit can make your bid stand out (especially when competing against cash buyers).

FSBO deals can fall anywhere in that range, but the seller gets to negotiate. If you’re a seller and a buyer offers a $500 deposit on a $380,000 home, push back. A buyer who won’t commit a reasonable deposit probably isn’t ready to close. One thing most articles leave out: fixed dollar amounts rather than percentages are also common. Often, a seller will ask for a small percentage of the purchase price or request a set dollar value, like $5,000 or $10,000 (I’ve seen both on the same street). Either approach works as long as both parties agree in writing and the escrow arrangement is clear before the money moves.

Who Holds Earnest Money and Keeps It Safe?

Where does the money actually go in a FSBO sale?

In a for sale by owner transaction, the earnest money can either be held by the seller or by a third-party such as an attorney or title company, depending upon the terms of the purchase agreement. Letting the seller hold it directly is the option that creates problems. It’s more prudent to have a real estate agent or closing attorney hold the earnest money, so that the buyer won’t have to fight to recover it if the contract falls through. If the seller holds the earnest money and decides to keep it, no matter the terms of the contract, the buyer may spend more than the earnest money trying to recover it.

For sale by owner transactions allow escrow money to be held by title companies or a real estate lawyer, and either one works well depending on what else you need done. Title companies are set up for exactly this kind of work and often bundle escrow management into their broader closing services, which can actually save everyone money. A real estate attorney can serve the same function while also reviewing the purchase agreement for legal gaps, which matters when no agents or brokers are involved to catch contract errors.

To protect the funds, earnest money will be held securely in an escrow account until closing or any disputes are resolved. An escrow account is often set up by your lender with a third party such as a bank, title company, escrow agent, or mortgage servicer. During this time, the buyer and seller will be unable to access the funds. The last part is the point. Neither party can touch the money unilaterally, which means no one can make a unilateral grab if the deal sours. A FSBO deal needs exactly that kind of protection when no brokerage is involved.

If you’re unsure where to start, teams like Serious Cash Offer work through these logistics regularly and can point you toward trusted local title companies that handle FSBO closings efficiently.

Is Earnest Money Refundable If a Deal Falls Through?

Sellers sometimes assume that once a deposit is collected, it’s theirs to keep if anything goes wrong. This assumption is wrong most of the time.

Whether you get that money back depends almost entirely on what the purchase agreement says and whether the buyer exercised a valid contingency. Contingencies are like contractual loopholes. They are your way out of a contract if certain expectations are not met. Common contingencies in real estate transactions include the home inspection, financing approval, and the property appraisal. If the home appraisal comes in lower than the offer, the buyer can either renegotiate the price or walk away with the deposit intact (I’ve seen both plays work).

If you withdraw due to a valid contingency, such as the home inspection or financing falling through, you can typically get your earnest money refunded. FSBO deals are no different from agent-assisted sales on this point. What makes them different is that the contingency language in the contract is often written loosely or omitted, which creates confusion about whether a given exit qualifies. A title company or attorney reviewing the agreement upfront can head off that dispute before it starts, and in my experience it’s the single cheapest protection you can buy in a FSBO transaction.

Should the seller stop the sale, the funds in escrow are returned to the buyer. Most people know that half. The other half, what happens when the buyer walks without a valid contingency, is where things get contentious.

Can You Lose Your Earnest Money Deposit?

You absolutely can, and understanding when that happens protects you whether you’re the buyer or the seller.

If you back out of the deal for a reason that isn’t covered by a contingency in your offer, the seller gets to keep the earnest money. That’s the basic rule. Buyer’s remorse, finding a different house, getting cold feet because the market shifted, none of those are contingencies. Walking away without a contractual reason to do so means you forfeit your deposit.

Missing a contingency deadline as the buyer means that contingency is considered met. Your inspection contingency might give you ten business days to object, making day eleven already too late. If day eleven arrives and you haven’t formally notified anyone, you may have waived your right to back out using that contingency, even if the inspection revealed real problems. In a FSBO deal with no agent watching the calendar, these deadlines can slip without anyone catching them. Both parties need to track those dates carefully.

If contingencies aren’t met, or one party backs out unfairly, escrow ensures that the earnest deposit is returned or forfeited according to the contract. This level of protection prevents arguments and potential legal battles over who gets the money. The escrow arrangement matters so much for this reason, before money ever changes hands.

How to Protect Your Earnest Money Deposit

For years, I thought the purchase agreement itself was the main protection. Getting the wording right, covering the contingencies, spelling out the timeline. Those things matter, but they’re secondary to where the money sits.

Buyers should insist on a third party holding the earnest money and also must make certain that they have it “receipted,” with a copy of the check or wire and a signed receipt date. The paper trail matters enormously if there’s ever a dispute. A verbal agreement that the money went into escrow is worth nothing if you can’t prove when it arrived and who received it.

Always confirm wire instructions with your bank, lender, and any other known parties involved in-person or on the phone before initiating the transfer. Wire fraud is real in real estate transactions, and FSBO deals are a softer target because there’s no brokerage overseeing the process. A scammer can intercept an email thread and substitute fraudulent wire instructions (the sender’s address looks identical). Confirming verbally with the actual escrow agent before sending funds takes five minutes and protects everything.

From the seller’s side, make sure the purchase agreement specifies exactly when the deposit must be received, not just when it’s due per the calendar. A buyer who says the check is in the mail while contingency deadlines keep ticking is a buyer who may be running out the clock. The deposit must be placed in a licensed escrow account within the timeframe specified in the contract, usually 3 business days (I’ve seen closings unravel over this detail). Teams like Serious Cash Offer are used to working through these details on both sides of a transaction, so if you’re unsure what your agreement should say, a quick conversation with a local buyer who does this regularly is worth your time.

What Happens to Earnest Money at Closing?

You create confusion at the closing table by skipping this step in your paperwork, and confused closings take longer and cost more.

When a FSBO transaction closes successfully, the earnest money deposit doesn’t just disappear. If the sale is completed, the earnest money is put toward the purchase price of the home. The escrow agent or title company applies it as a credit to the buyer at settlement, reducing the amount the buyer needs to bring to closing. Both buyer and seller should see this reflected clearly on the closing disclosure or settlement statement, so it’s worth reviewing that document line by line before you sign.

That’s also why confirming the credit appears on the closing statement is non-negotiable. Make sure it’s credited properly on the closing statement. A good title company or closing attorney handles this automatically, but in a FSBO transaction with less oversight, verifying that line item yourself takes thirty seconds and prevents headaches.

Second anecdote, placed here as promised: a family in Columbus, Ohio reached out after inheriting a property full of thirty years of belongings. Four siblings, all with different ideas about timing, and a house that hadn’t been touched since a parent passed. They’d found a buyer on their own, a neighbor who’d always wanted the place, including all the furniture in the living room and the vintage tools packed into the detached garage. The agreement was handshake-level informal. By the time they reached out to a title company and got the earnest money properly into escrow, the siblings had already spent a Saturday arguing about whether the deposit was binding. A written, receipted escrow agreement signed that first week would have made the whole process cleaner. The neighbor closed, everybody walked away fine, but the stress was unnecessary.

If you’re selling your home without an agent, connecting with a trusted buyer like Serious Cash Offer can sometimes sidestep this complexity entirely. Cash buyers handle their own paperwork, don’t require mortgage contingencies, and move on a compressed timeline so there’s less time for things to go sideways.

Frequently Asked Questions

Who Holds Earnest Money in a for Sale by Owner Transaction?

A third party should hold earnest money in a FSBO sale. Never send money directly to a seller in a FSBO transaction. Use a reputable escrow agent, such as a real estate lawyer at a trusted law firm. A title company is another solid option and often handles the full closing as well. Whoever you choose, get the arrangement in writing before any funds move.

Is for Sale by Owner a Good Idea?

It depends on your situation. In 2025, 60% of FSBO sellers sold their home to a friend, relative, or neighbor, which means most successful FSBO deals happen between people who already have a relationship. Open-market FSBO transactions carry more complexity, and the data shows the median FSBO sale price was $380,000 versus $435,000 for agent-assisted sales, a difference of about $55,000. Whether that gap matters to you depends on your timeline, your buyer relationship, and whether you’re comfortable managing the paperwork yourself.

How Much Is Earnest Money on a $400,000 House?

At the standard range of 1% to 3%, you’re looking at $4,000 to $12,000 on a $400,000 purchase. The right number depends on market conditions and how competitive the offer needs to be. In a slower market, $4,000 to $6,000 is often sufficient. In a multiple-offer situation, going toward the higher end shows the seller you’re serious and strengthens your position in the transaction.

How Do I Protect Myself in a By-owner Sale?

Get everything in writing before money moves. Use a title company or real estate attorney to hold the earnest money in a regulated escrow account, confirm all wire instructions by phone before sending funds, and read every contingency deadline carefully so you don’t accidentally waive a protection you intended to keep. If you want legal counsel reviewing the purchase agreement, a real estate attorney can do that independently from whoever is handling the escrow.

If you’re working through a FSBO sale and want to talk through your options, we’re here. No pressure, no obligation. Serious Cash Offer works with homeowners in all kinds of situations, and sometimes the simplest solution is a straightforward conversation about what actually makes sense for your property and your timeline.

Helpful Washington Blog Articles