PRELIMINARY CONTRACT: DEPOSIT OR EARNEST MONEY
October 20, 2025
The difference between a deposit and earnest money in preliminary agreements for the purchase and sale of real estate often creates confusion for buyers. However, the consequences of poorly drafted text can be significantly unfavorable.
WHY DEVELOPERS AND INVESTORS TERMINATE PRELIMINARY AGREEMENTS
In recent days, another case in Sofia has attracted public attention: dozens of families will be left without homes because of poorly drafted preliminary agreements.
How and why this happens:
- The builder/investor has signed dozens of preliminary “off-plan” agreements, taken deposits, and used these funds to construct the building.
- At a certain point /2-3-4 or more/ years after the start of construction, property prices have increased drastically.
- For the seller, it is no longer profitable to fulfill the agreement and transfer the apartments to the buyers at the agreed price. Instead, they prefer to terminate the agreements, return the deposits received, and sell the properties to new buyers for much more money.
Such situations are not rare in the construction industry. The reputation of these developers suffers, but they achieve enormous profits.
TRICKS IN THE PRELIMINARY REAL ESTATE SALE AGREEMENT
In recent years, property-selling investors have started to insert various clauses that give them an elegant “exit” from the agreement. Thus, the preliminary agreement turns out to be more of a wish, failing to serve its main purpose – to transform into a final contract in the form of a notarial deed. One of the main tricks companies use is formulating the deposit clause as “earnest money.”
THE DIFFERENCE BETWEEN A DEPOSIT AND EARNEST MONEY
Although seemingly similar, the deposit and earnest money are two distinct legal concepts. They have different legal consequences and can lead to serious risks if not properly agreed upon.
What is a deposit?
A deposit represents a partial advance payment toward the future transaction. It serves two functions:
- evidentiary – confirming that an agreement has been reached;
- security – acting as a guarantee that the parties will fulfill their obligations.
If the party that gave the deposit fails to fulfill the agreement, the other party has the right to keep it. If the defaulting party is the one who received the deposit, they must return double the amount.
What is earnest money?
Earnest money has an entirely different meaning. It gives the party who provided it the right to withdraw from the agreement without owing compensation. In other words, if one party decides not to proceed with the contract, they lose the earnest money given, and if they had received such, they must return it.
This is a kind of “withdrawal fee,” not a performance guarantee.
Where does the risk arise?
The main risk comes from the improper wording of the preliminary agreement. In practice, terms like “deposit” are often used, but in court proceedings, it may turn out that the sum was agreed upon as earnest money – and vice versa. This may lead to:
- loss of substantial amounts of money;
- inability to terminate the contract in the desired way;
- prolonged legal disputes.
Conclusion:
The distinction between a deposit and earnest money is essential – it can mean keeping or losing thousands of leva. The preliminary agreement is not a “mere formal step” but a legal act with long-term consequences. Many risks can be avoided if the buyer of a property under construction (“off-plan”) does not rush to sign the preliminary agreement but studies it carefully or consults a lawyer.
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