REAL TipS: BUYING
Understanding the lingo – option fee and option period
If you’re considering buying residential real estate in Texas, you should know about a common contract feature called the termination option.
Many times, when an offer is made on a residential property in Texas, the prospective buyer will cut two checks: one for the option fee, another for the earnest money.
The option fee is a payment that a prospective buyer gives to the seller. The fee gives the buyer the right to terminate the contract for any reason, at any point during the “option period.” The length of the option period is negotiable, but is typically between 7-14 days.
If you do not exercise your option to terminate, this fee can be credited to you at the closing table.
During the option period, you have time to perform your due diligence and conduct further investigations into the property, like getting a home inspection. It also keeps the seller from selling the house to anyone else during this time. During this option period, the seller may negotiate and accept back-up offers, but he is still contractually bound to sell the property to you until that contract agreement is terminated.
Since the option fee is non-refundable, it should be small enough to not be a huge loss, but large enough to let the seller know that you have immediate plans to move forward with your due diligence.
Do not confuse the option fee with earnest money, which is money that a buyer puts down to show the seller that he’s serious about the purchasing the property. Earnest money can be anywhere from several hundred to several thousand dollar. This money, which sits in an escrow account, contractually binds the buyer and seller from the end of the option period until closing. The amount is large by design; it acts as an incentive for you, the buyer, to hold up your end of the contract.
If you have further questions about the option fee or option period, ask your Texas REALTOR®; she should be able to give you the advice you need.
Texas Association of Realtors®
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