When it comes time to buy a house or apartment, especially in highly sought-after areas like Estepona or the Costa del Sol, every step matters. Among them, the earnest money contract is one of the most crucial. This private agreement between buyer and seller acts as a sign of commitment, serving as a guarantee for both parties until the final deed is signed.
Often, those starting this process are not fully aware of its scope or implications. That’s why working with a real estate agency in Estepona specializing in this area, such as Cabanillas Real Estate, provides not only legal security but also peace of mind throughout every stage of the transaction.
👉 In our latest article, we explain the requirements for buying a house in Spain as a foreigner.
What is an earnest money contract?
To get into the details, an earnest money contract is a private agreement between the buyer and the seller of a property that is signed before the public purchase agreement. Its main function is to ensure that the transaction will go ahead under the agreed terms, with the buyer handing over a sum of money as a deposit or guarantee. This document is not the sale itself, but rather a formal commitment to carry it out in the future. So, what is the earnest money in a purchase contract? It is precisely that amount of money that formalizes the agreement.
Legally, not all earnest money contracts are the same. There are three main types, and it is essential to understand the differences:
- Confirmatory earnest money: Confirms the existence of the contract and the amount paid is an advance on the total price. If either party defaults, the other can demand performance of the contract or compensation for damages, but it does not allow for easy withdrawal from the agreement.
- Penitential earnest money: The most common type in real estate. It allows either party to legally withdraw from the contract. If the buyer withdraws, they forfeit the amount paid. If the seller withdraws, they must return double the amount received. These are regulated under Article 1454 of the Spanish Civil Code.
- Penal earnest money: Functions as a penalty clause. In case of breach, the defaulting party loses the earnest money (or returns it doubled), but the affected party may also demand performance of the contract.
How is an earnest money contract for a property drawn up?
Knowing how to draw up an earnest money contract is essential to avoid future problems. This document must be clear, precise, and leave no room for interpretation. Although there is no single format, there are essential elements that every contract for the purchase of a property must include to be valid and secure. The wording must be meticulous, detailing every aspect of the agreement to protect both parties.
But, who drafts the contract? It is usually prepared by the real estate agency handling the transaction or by a lawyer representing one of the parties. It is crucial that it be drawn up by an experienced professional to avoid abusive clauses or errors. Once it is written, who signs the earnest money contract? All parties involved must sign it: all buyers and all property owners. And, where is the contract signed? It is most commonly signed at the offices of the real estate agency, which acts as a witness and mediator, ensuring that everything is carried out properly.
Earnest Money Contract Between Private Individuals: What Are the Risks?
Signing an earnest money contract between private individuals without professional supervision may seem like a way to save money, but it often becomes the source of serious problems. One of the most common mistakes is using a template downloaded from the internet without adapting it to the specific situation. These generic models often lack essential clauses, such as those making the purchase conditional on obtaining a mortgage or specifying who covers certain expenses.
The risks are numerous: from an incorrect description of the property to failing to verify whether the home has outstanding debts or charges (such as liens or community fees). An unrealistic signing deadline or the absence of clear penalties for breach of contract can leave one of the parties completely unprotected. Knowing how to draw up an earnest money contract without running into trouble almost always means relying on experts who will safeguard your interests.
What legal validity does an earnest money contract have?
A common question is what legal validity an earnest money contract has. The answer is clear: it has full legal validity. It is a private contract that binds both parties to comply with the agreed terms. Its duration is defined by the period specified in the document itself for formalizing the public deed of sale. This deadline is binding and must be respected.
If the deadline expires and the sale has not been signed before a notary, the contract is considered breached, and the corresponding penalties are triggered (forfeiture of the deposit or return of double the amount), unless both parties agree in writing to an extension. Therefore, it is a document with significant legal weight that should not be taken lightly.
Is it mandatory to draw up an earnest money contract?
Legally, no, it is not mandatory to draw up an earnest money contract to buy a property. One could go directly to signing the public deed. However, in practice, it is an almost essential and highly recommended step. Why? Because weeks or even months usually pass between the verbal agreement and the notary signing—time needed for the buyer to secure financing, the seller to arrange the move, and all administrative procedures to be completed.
Leading real estate agencies like Cabanillas Real Estate consider the earnest money contract an essential step in any property purchase. This document provides peace of mind and security for both parties, setting the terms in writing and preventing either side from backing out without consequences. It is the best way to formalize a commitment and ensure the transaction moves forward smoothly.
👉 In our latest article, we tell you everything you need to know about real estate asset management. Keep reading to find out all the details!
What should an earnest money contract template include?
Although it is advisable to have a professional draft it, knowing the key sections will help you review any template. A solid document—whether it’s a model contract provided by your agency or a template reviewed by a lawyer—should include at least the following information:
- Details of the parties: Full identification of buyers and sellers (name, ID number, address).
- Description of the property: Exact address, land registry reference, registered description, and a statement confirming it is free of encumbrances and tenants.
- Total purchase price: The final price agreed upon for the property.
- Amount of the earnest money: The exact amount paid as a deposit, specifying that it will be deducted from the final price.
- Type of earnest money: Clearly state whether they are penitential, confirmatory, or penal.
- Deadline: The maximum date for signing the public deed before a notary.
- Expense allocation: Who will bear the costs of the transaction (notary, land registry, municipal capital gains tax, etc.).
- Penalties: Clear consequences in case of breach by either party.
Although you can find a PDF earnest money contract template online, remember that every transaction is unique. Professional oversight is your best guarantee.
What happens if the earnest money contract is breached?
The consequences of breaching an earnest money contract vary significantly depending on which party is at fault and the type of earnest money agreed upon in the contract. If the buyer decides not to proceed with the transaction without justified cause, they typically forfeit the earnest money, which the seller keeps as compensation for the damages caused.
On the other hand, if the seller breaches the contract, they must return double the amount received from the buyer. This penalty, known as “double earnest money”, is intended to compensate not only for the initial deposit but also for any expenses and losses the buyer may have incurred due to the breach.
What happens if the earnest money contract is not fulfilled? It may also lead to claims for additional damages, especially if the breach has caused extraordinary expenses for the affected party. For instance, if the buyer has spent money on appraisals, legal reviews, or mortgage arrangements based on the commitment made.
What role does the real estate agency play in this contract?
The real estate agency plays a crucial role as an intermediary and advisor throughout the earnest money contract process. Its expertise is invaluable in drafting a document that protects the interests of both parties, avoiding ambiguous clauses or legal gaps that could lead to future disputes.
An experienced agency, such as Cabanillas Real Estate in Estepona, not only facilitates the drafting and signing of the contract, but also monitors its fulfillment, keeping track of key deadlines and mediating if doubts or minor disagreements arise between the parties. This intervention is especially valuable in complex transactions.
The benefit of working with specialized professionals becomes clear when unexpected issues arise: changes in financing, problems with the property’s documentation, or changes in the personal circumstances of the parties involved. An experienced real estate agency can propose practical and legally sound solutions that keep the transaction on track and avoid costly legal proceedings.
Frequently Asked Questions
What does the earnest money contract imply?
The earnest money contract implies a formal commitment between the buyer and seller to carry out the sale under the agreed conditions. It also serves as a preliminary step to the final purchase agreement, establishing a legal framework that significantly reduces the risk of either party backing out arbitrarily. The commitment involves not only financial aspects, but also the fulfillment of deadlines and specific conditions.
How much money is given in the earnest money contract?
The amount of earnest money usually ranges between 5% and 10% of the property’s sale price, although this can vary depending on the agreement between the parties. In high-value transactions or highly competitive markets, the percentage may be higher to demonstrate a stronger commitment.
What happens if I sign an earnest money contract and my mortgage is not approved?
If you have included a termination clause for mortgage denial in the contract, you are entitled to recover the full earnest money amount without any penalty. This clause should specify the maximum deadline to obtain financing and, ideally, the minimum conditions the mortgage must meet (amount, term, interest rate).
Without this protective clause, mortgage denial would be considered a breach of contract by the buyer, which would result in the forfeiture of the earnest money. Therefore, including this protection is essential when the purchase depends on external financing, especially in the current economic climate where mortgage approval criteria can vary.
What should I take into account in an earnest money contract?
Mainly, four things: 1) that the deadlines for signing are realistic; 2) that the conditions (free of encumbrances, etc.) are clearly stated; 3) that the penalties for breach are well defined; and 4) the importance of always having professional advice, whether from your trusted real estate agency or a lawyer.
How is earnest money regulated?
Penitential earnest money, the most common type, is primarily regulated by Article 1454 of the Spanish Civil Code. This article states: “If earnest money or a deposit has been given in a sale and purchase contract, the contract may be rescinded, with the buyer forfeiting the deposit or the seller returning it doubled.” This is the legal basis that provides security and clear rules for this type of agreement.
Conclusion
The earnest money contract is not just a formality, but a cornerstone that brings certainty, commitment, and security to one of the most important decisions of your life: buying a home.
In a process with so many legal and financial implications, improvisation is not an option. Having the support of a real estate agency in Estepona like Cabanillas Real Estate ensures that your earnest money contract will work in your favor, guaranteeing a transparent, professional, and stress-free process.
If you’re thinking about selling a home in Estepona or buying a property on the Costa del Sol, and want to take each step with total confidence, don’t hesitate to contact us. We’re here to guide you and make sure your path to a new home is as exciting as it is secure.
Si tienes consultas puedes contactar en sales@cabanillasrealestate.com
- How much does it cost to register the deed of a house in Spain? - September 25, 2025
- How to cancel a mortgage in Spain - September 18, 2025
- What Is Real Estate Asset Management and Why Is It Key in Estepona - August 26, 2025
