Idaho Real Estate Practice Exam

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What is the primary purpose of an earnest money deposit in a real estate transaction?

To pay for the appraisal
To secure the transaction and show good faith
To cover closing costs
To establish ownership

The correct answer is: To secure the transaction and show good faith

The primary purpose of an earnest money deposit in a real estate transaction is to secure the transaction and show good faith. This deposit acts as a demonstration of the buyer's seriousness and intent to follow through with the purchase. It signals to the seller that the buyer is committed to the deal, and it helps to provide an incentive for the seller to take the property off the market while the transaction is being finalized. When a buyer places an earnest money deposit, it serves as a form of financial assurance that the buyer will not walk away from the transaction without a valid reason. If the buyer fails to meet the terms of the purchase agreement without a justifiable reason, the seller may have the right to retain the earnest money as compensation for the time the property was under contract and potentially lost other offers. The other options, while related to aspects of real estate transactions, do not capture the main purpose of the earnest money deposit. The deposit is not intended for appraisal costs, covering closing costs, or establishing ownership; instead, it plays a crucial role in reinforcing the buyer's commitment to completing the sale.