Hi Scott, it looks to me like you really have three questions here. The first - "Why do buyers need to make an earnest money deposit? " - the earnest money deposit is really a show of good faith. You are saying to the sellers - I am not here just wasting your time, I am willing to take a risk, and commit to you that I am a serious prospect for this transaction.
Remember that ESPECIALLY in a buyers market, a seller putting their home under agreement is a HUGE risk. When sellers make a commitment to a buyer, they are saying, we are taking our house off the market, we will not allow other showings so that we can show you we are serious about completing this transaction with you. If you walk after the inspection, or because you can't obtain financing, or because you wake up in the morning and realize you want to live in another state, they have to put the house back on the market, and the house may have lost value while the sellers were wasting time with you.
The second question "What does the buyer get for their earnest money?" You get two things - most importantly, you get the house locked off the market so other buyers can't get in there and purchase it out from under you. Secondly, you get the use of that money back - however it is negotiated in your contract - most of the time, it comes off the purchase price of the home. Sometimes,, with cash strapped First Time Buyers, it can be negotiated that it will be returned to them. So in most cases, it is still your money. The only time you would get nothing for it is if you defaulted - or in other words, walked away from the contract without a negotiated reason, or after a key date had expired. Then the sellers get to keep it because it is likely their house lost value while you wasted their time.
Your third question, "What protects the buyers from the seller walking away from the inspection repair request with a free list of defects?" There are really two parts to this as well - first, you have to have some faith that this seller really wants to sell. Otherwise, why are they going to the trouble of meeting with an agent, completing the listing paperwork, cleaning their house for showings, etc...Why would the seller go through all this if they aren't serious? The second part is that once the sellers have been notified of a defect, it is not very smart of them to walk away from a committed buyer. You would be asking them to fix something that it is likely they will have to fix for any buyer who comes along. If you tell them that there is a defect with the roof, they walk away from you and sell to someone else, they should really tell these new buyers that there may be an issue with the roof. If they don't, they run the risk of being held liable for failure to disclose a material defect. When they do, guess what - the new buyers will want a new roof - why not just negotiate with you in the first place. The only reason sellers will sometimes walk away from a buyer with repair requests is if there is a long list - or a request which is in some way outrageous. In that case, the sellers must be convinced that they have a reason to take the risk of re-entering the market.
Lots of good questions here, I hope my answers are useful and that you have great transactions! Stacey