I don't know if she can ask for a non-refundable deposit, but she can certainly accept that contingency with the understanding she will continue to try to sell the home. If another offer comes in, she can notify them and give them a period of time to remove the contingency to sell their home.

This should be clearly written into the contract, something to the effect of Owner will continue to actively market the home and should another offer come in that is acceptable to the seller, the buyer will have X days/hours to remove the contingency of selling their home.

If she does the above contingency AND asks for the $500, she could offer to refund it if she sells it to another buyer b/c they were unable to remove the selling their home contingency, but not refund it if they are the ones to buy it.

Earnest money or deposit or whatever you want to call it, shouldn't be spent on utilities etc. It should be held in trust in case the contract falls through for a legitimate reason. Personally if someone asked me for a non-refundable deposit on a house, I'd run as fast as I could from that deal. Contracts fall through all the time, and not always at the fault of the buyer, sometimes the inspection shows the home is not what it was advertised to be. Sometimes the seller even backs out.

Yea, only earnest money I'd ever heard of..was one in which was just applied to everything in the end.
And refunded if something changed with the inspection, financing,etc.

I think because she's selling it FSBO right now..she didn't know what kind of rules there were, kwim? I hadn't even thought about something like an inspection going wrong. Which is a very valid point. All the work she had done, was because of some MAJOR subfloor rot and mold issues. (we were going to buy this house, but opted not to for these reasons. bought elsewhere) I constantly think about something with that coming back to bite her in the end. So, yea..to ask for money and SPEND it. Not being able to pay it back if the deal falls through..is sounding dumber all the time, lol.
I just didn't have a clue. I'll pass these thoughts on. TY!!!