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Abstract
In this study, we examine the factors that may influence the amount of earnest money deposits in real estate sell /buy contracts using contingent claims analysis within the Black-Scholes option pricing model, along with control variables for market trends and market customs. We find that earnest money amounts increase with property values, contract term, and property value volatility, and that earnest money amounts decrease with the risk-free rate. The data for the analysis come from HUD-1 Settlement Statements and the local MLS database for 670 residential real estate transactions.