Held in trust/escrow — never the agent's operating account
Before you read
Test yourself first: 5 questions
Question 1 of 5
A clause letting the seller keep the buyer's deposit as the agreed sole remedy if the buyer defaults is called:
Answer: A. Liquidated damages is an agreed-in-advance amount (often the earnest money) the non-defaulting party keeps, avoiding a fight over actual damages.
Question 2 of 5
When the earnest money is designated as liquidated damages and the buyer defaults, the seller typically:
Answer: B. If the contract makes the deposit liquidated damages, the seller may keep it as the agreed remedy without proving the exact amount of actual loss.
Question 3 of 5
Earnest money deposited by a buyer with a purchase-and-sale agreement primarily serves what purpose?
Answer: B. Earnest money is a good-faith deposit showing the buyer is serious; if the buyer defaults without an excuse, the seller may pursue it as damages.
Question 4 of 5
When a seller materially breaches a purchase agreement by refusing to convey, the buyer's possible remedies typically include all of the following EXCEPT:
Answer: D. Buyers do not post earnest money in a way that lets them keep the seller's deposit; available remedies are specific performance, damages, or rescission with a refund.
Question 5 of 5
A liquidated damages clause in a purchase agreement provides that:
Answer: A. A liquidated damages clause fixes, ahead of time, a reasonable amount one party will receive if the other breaches, avoiding the need to prove actual damages.
Keep the streak going with more questions like these, each with a full rationale.
Must-know rules
- Earnest money: good-faith deposit — NOT required for a valid contract, NOT consideration
- Held in trust/escrow — never the agent's operating account
- Liquidated damages clause: seller keeps the deposit as the agreed remedy for buyer default
- Other remedies: specific performance (force the sale), compensatory damages, rescission
- Buyer default choices are set by the contract — read the remedies clause
Earnest Money & Liquidated Damages: FAQs
Is Earnest Money & Liquidated Damages on the real estate exam?
Yes. Contracts & Transfer of Title is a scored domain on the real estate licensing exam, and this topic appears in the national portion.
Is this cheat sheet free?
Yes — every page on Cinna RE's resource library is free to read, print and share. The app adds practice questions, mock exams and a readiness score.
