contract-law real-estate
Is the real estate contract still enforceable if ZERO Earnest Money Deposit is placed in Real Estate Purchase and Sale Agreement?
<p>I thought <em>earnest money</em> constitutes buyer's <em>consideration</em>. So, without earnest money, the seller can void the contract on the ground of <em>Buyer's Lack of Consideration</em>. Because of that, I occasionally heard people putting down a token amount of $10 or $100 for consideration.</p>

<p>On the other hand, I also heard that buyer's purchase price payment itself is buyer's consideration, and according to <a href="https://law.stackexchange.com/a/8824/12617">this post</a>, earnest money is instead used to compensate <em>liquidated damage</em> in the event of buyer's preach of contract.</p>

<p>My question is, if the sole purpose of earnest money is to pay for the potential liquidated damage, <strong>will the contract still be enforceable if the buyer pays absolutely no earnest money given that both parties agree with this arrangement?</strong></p>

<p>The contract will still be enforceable if no earnest money is given. The exchange of the real estate for the purchase price is completely adequate consideration sufficient to support a contract, even without earnest money.</p>

<p>It could be enforced by specific performance, or conceivably by a suit for actual money damages. </p>

<p>In general, lack of consideration almost never prevails as a defense to a claim for breach of contract and even when it does, if the non-breaching party relied on a promise that was allegedly a contract, there is still an action for promissory estoppel available, which is essentially identical to a breach of contract action, but substitutes reliance for consideration in the elements of the claim that must be established.</p>

<p>The main downside of not having earnest money with a liquidated damages clause for a seller is that it is likely to be hard to prove the a breach of the contract caused damages in a particular dollar amount that couldn't be mitigated by finding another buyer. Specific performance (i.e. compelling the buyer to purchase the property) is also often not a viable remedy as the buyer may very well be unable to perform (e.g. due to lack of loan financing) when the lawsuit is finally resolved.</p>

<p>The main downside of not having earnest money with a liquidated damages clause for a buyer is that the buyer's exposure to damages if the contract is breached is not well defined. For example, if the buyer breaches a contract to buy a house for $1,500,000 and then a real estate bubble pops before the property can sold and the property eventually sells for $500,000, the buyer in breach is exposed to $1,000,000 of damages when a typical earnest money deposit in a deal like that one might be $50,000 and would not result in costly litigation.</p>
