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Practice of Real Estate term

Earnest Money

A buyer's good-faith deposit made when submitting an offer, held in trust and credited at closing.

Why Earnest Money matters on the exam

This term belongs to Practice of Real Estate. The questions below are real items from Freehold's bank that use it - each one cites its source.

Exam questions using Earnest Money

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A broker deposits a client's earnest money into the brokerage's operating account. This violation is called:

  1. Conversion to personal use
  2. Commingling
  3. Novation
  4. Subordination
Show answer & explanation

Commingling — Commingling is mixing client trust funds with the brokerage's own operating funds. It is a license-law violation even if no client money is ever spent, because it puts trust funds at risk.

Source: PSI National Real Estate Exam Content Outline — Broker Supplement

After a purchase contract is signed, the earnest money received by the brokerage must be:

  1. Deposited into the trust account within the deadline set by state law
  2. Held in the office safe until the closing
  3. Deposited directly into the broker's own separate personal operating account
  4. Given directly over to the seller immediately upon its receipt by the firm
Show answer & explanation

Deposited into the trust account within the deadline set by state law — State license laws require earnest money to be deposited into the broker's trust or escrow account promptly, within a statutory deadline that varies by state. Holding or misdepositing funds violates license law.

Source: PSI National Real Estate Exam Content Outline — Broker Supplement

In real estate practice, 'commingling' refers to which of the following?

  1. Mixing client trust funds with the broker's personal or operating funds
  2. Using client trust funds to pay personal expenses
  3. Splitting a commission between two cooperating brokers
  4. Depositing two clients' earnest money into the same trust account
Show answer & explanation

Mixing client trust funds with the broker's personal or operating funds — Commingling is the mixing of client trust funds with the broker's own operating or personal funds; it is prohibited even without misuse because it jeopardizes the safety of client money.

Source: PSI National Real Estate Exam Content Outline — Broker Supplement

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