Final answer:
In real estate transactions, earnest money is a deposit showing the buyer's intent to complete the purchase and is applied to the purchase price, whereas option money is paid for the right to buy the property within a specified period, non-refundable if the buyer decides to not proceed.
Step-by-step explanation:
Distinguishing Earnest Money from Option Money
In real estate transactions, understanding the differences between earnest money and option money is crucial. Earnest money is a deposit made by the purchaser when a sales contract is signed as a demonstration of their good faith and intent to complete the transaction. It is typically held in an escrow account and applied to the purchase price at closing. On the other hand, option money is paid by the buyer for the exclusive right, for a limited time, to purchase the property at an agreed-upon price. This payment gives the buyer the option to proceed with the purchase within the option period or to walk away, usually forfeiting the option money. Option money is usually less than earnest money and is not necessarily applied to the purchase price unless specified in the option agreement. While earnest money is part of the contractual obligations of a sales agreement, option money can be seen as payment for the flexibility and time to make a purchase decision without the commitment of an immediate sale.
Real estate professionals should ensure clients fully understand these terms, as they represent different levels of commitment and financial involvement in the property acquisition process.