Here in America, we have generous retail return policies. When you’re not entirely happy with a purchase, you are free to return it within a specified number of days. Consumers have expressed in surveys that this is an essential factor in a purchasing decision. We have a similar concept in the real estate world – the option period.
The option period in real estate gives a buyer time to “sleep on it” after signing a purchase contract. After a period of time, the buyers and sellers may agree to take either of the following paths: make the home sale final, extend the option period, or terminate the contract.
What Is An Option Period?
We call the option period in Texas the termination option. A buyer has to pay an option fee to the seller for an option period to be part of the real estate contract.
The option period empowers the person buying a home to terminate the contract for any reason at all within the days in the option period. Without an option period, the buyer risks forfeiting their earnest money deposit if they end the contract without a valid cause.
What Do You Do During The Option Period?
The option period is an excellent time for buyers to exercise their due diligence. Number one on your checklist should be a home inspection performed by a licensed inspector. We also recommend having a professional mold inspector do a separate mold inspection on the house.
The home inspector will assess the structures (roof, floors, walls, foundation) and mechanical systems (HVAC, plumbing, electrical) of the property. After the inspection, the inspector will generate a report on the status of the home and the repairs needed. Two things can happen: the seller will shoulder the cost of all repairs or adjust the sale price.
If the seller refuses to do this, this is where you will be able to use your option period benefit. You may withdraw from the contract and safely get your earnest money back.
The other aspect you should have in order is your financing. At this time, a real estate appraiser should have adequately estimated the home’s value. It is also ideal if you have passed the pre-approval screening of your lender or bank for the asking price.
If the appraisal does not align with the asking price, the bank will not likely approve your home loan. You can take advantage of the option period and end your contract with the seller.
Is An Option Period Required?
Not really, but some might say that an option period is as crucial as having a realtor in the buying and selling process. The only pro of not having an option period is that a seller might find the transaction with you more appealing than the other buyers because you will probably not pull out of the deal.
Does It Cost Money To Get An Option Period?
Yes. The refundable fee is between $10 to $200. The exact amount will depend on the agreement of the buyer and the seller.
The option fee spent can be deducted from the sale price when the contract moves forward. However, the buyer may not refund the option fee when they conclude the contract within the option period.
How Long Is An Option Period?
The option period generally takes 1 to 10 days. What happens after the option period expires? Again, this could go two ways: the buyer and seller will proceed with the contract after some potential revisions, or they may extend the option period as arranged.
What Is The Difference Between The Option Fee And Earnest Money Deposit?
We understand if you experience a little confusion with the real estate jargon. It is part and parcel of one of the largest transactions you’ll ever have to do. This rule of thumb might help – the option fee is only in the hundreds, while the earnest money is in the thousands.
Remember that the option fee enables you to have an option period clause in your contract, while the earnest money is the deposit you make to secure the sale of the home you intend to buy.
An option fee can be credited back to the buyer after closing the sale but not when they end the contract within the option period. A buyer may be refunded their earnest money when they terminate the contract within the option period but risk losing their earnest money outside of the option period.
Can Someone Else Offer On The House During The Option Period?
As of the effective date of the option period, a seller must not entertain any new offers on the house and must mark it as “Option Pending.” The seller also cannot stage and allow viewings on the home.