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You are here: Home / Buying a Home / Option Period in Real Estate Contracts

Option Period in Real Estate Contracts

July 31, 2012 by khproperties 1 Comment

Option Period

The option period in the Texas “One to Four Family Residential Contract (Resale)” is one of the greatest protections for buyers built into real estate contracts. It is simple and easy and provides buyers with a chance to terminate the contract with no risk and little financial loss. But what exactly is its function and why do you need to use this when making an offer on a home? This post has been updated to reflect the most recent changes to the option period language in the contract (updated January 1, 2016).

Section 23 – Termination Option

23. TERMINATION OPTION: For nominal consideration, the receipt of which is hereby acknowledged by Seller, and Buyer’s agreement to pay Seller $______ (Option Fee) within 3 days after the effective date of this contract, Seller grants Buyer the unrestricted right to terminate this contract by giving notice of termination to Seller within ___ days after the effective date of this contract (Option Period). Notices under this paragraph must be given by 5:00 p.m. (local time where the Property is located) by the date specified. If no dollar amount is stated as the Option Fee or if Buyer fails to pay the Option Fee to Seller within the time prescribed, this paragraph will not be a part of this contract and Buyer shall not have the unrestricted right to terminate this contract. If Buyer gives notice of termination within the time prescribed, the Option Fee will not be refunded; however, any earnest money will be refunded to Buyer. The Option Fee will will not be credited to the Sales Price at closing. Time is of the essence for this paragraph and strict compliance with the time for performance is required.

As you can see, there are three negotiable points to this paragraph – time, money, and whether or not that money will be credited back to the buyer at closing. These three points can be anything – or the entire paragraph can be skipped (and the option period waived, although we don’t recommend it).

The purpose of the paragraph is to provide the buyer with the unrestricted right to terminate the contract. The unrestricted right simply means that the buyer doesn’t need a reason to terminate the contract – they have the option to terminate the contract for any reason. Typically, it is used to give buyers time to inspect the home and negotiate any repairs they might want done to the home before they continue on with the purchase.

The time and money provisions of the option period are completely up to the buyers and sellers. Typically here in San Antonio you will see a request for 10 days for $100. The option fee check (in this case $100) is written by the buyer directly to the seller. When the contract is agreed upon, the seller may cash the check immediately. The choice that the money will be credited back to the buyer at closing is usually the preferred checkbox at the end of the paragraph.

Once the option period begins, buyers may perform inspections on the home to determine if there are any necessary repairs. The seller does not have to agree to do those repairs, so it becomes a negotiation point once again. If both parties can not come to an agreement during the option period, the buyer may elect to use their unrestricted right to terminate the contract with no penalty other than the loss of the option fee (which they paid directly to the seller). The buyer may also cancel the contract just because they feel like it or because they realize they don’t like the home or because it’s a Tuesday – basically, for any reason. All they lose is the option fee (in the case mentioned above, $100). They do not risk losing their earnest money if the terminate within the option period.

Option Period – Protect Yourself

The option period and the protection it provides are very useful in real estate contracts. Have you ever heard of “buyer’s remorse” – it’s a real thing and we have seen it happen before. Even without a reason like that, the option period is essential when getting inspections – it allows for time for them to be done as well as time to negotiate what repairs the buyer may want the seller to do. Do yourself a favor and be sure and get an agreed upon option period when buying a home – without it, you have one less way you can terminate the contract if you are not happy with the home.

Note: Many bank-owned homes or those involved in relocation will not provide an option period. Many however will provide an inspection period which functions in the same basic way. Always read the related addenda to a contract (your agent should point these out – if not, you need a new real estate agent) and know what all of your options are for potential termination of the contract – not that you want to cancel, but there’s always a chance something will pop up that will give you a need to cancel.

image of contracts courtesy of the CJ Sorg

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  • Residential Contract: A Closer Look at Buying a Home Part IResidential Contract: A Closer Look at Buying a Home Part I

Filed Under: Buying a Home Tagged With: buying a home, option period, contracts

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