Did you know that if you are considering purchasing a home, you can actually buy yourself some time? This time is called an option period and the length of time will vary depending on the terms of the contract. The option provision allows buyers to terminate a new-home or resale contract-for any reason at all-and still receive a refund of their earnest money.
This option provision, also known as the termination option, is in all Texas Real Estate Commission (TREC) residential contracts. Many buyers will use the option period to evaluate the property with a professional inspection or to address any other concerns they may have. There may even be some buyers who simply want an opportunity to say "no thanks." The key here is that the option provision provides buyers a way out, and it doesn't matter what the grounds are.
Benefits to buyers
So let's say your Realtor helped you find the perfect house, and you submit an offer without knowing too much about the property. You do know, however, that the seller would like $2,000 in earnest money. That's a scary number when the house hasn't been professionally inspected. What's even worse is that while you're waiting for a professional inspection, another buyer could swoop down with an offer that the seller simply can't refuse. Here's where the option provision comes in.
The option period allows the buyer time to evaluate the property without the risk of losing their earnest money or the property to someone else. Here's how it works. The buyer will write two checks-one to the title company for the earnest money and one directly to the seller for the option provision. The terms of the option period are negotiable. But the seller has the right to cash that check upon receipt. The earnest money, on the other hand, is held by the title company throughout the transaction. Earnest money is not at risk during the option period.
Back to the situation above-let's say you've negotiated an option period at a price of $100 for 10 days. Now you can bring in a professional to evaluate the property and make sure its condition fits your needs. If it doesn't, you can terminate the contract. If you do so within the 10-day timeframe, the title company will return your earnest money check. You will, however, lose the option fee. You might also note that you'll be out the cost of a professional inspection as well. However, when considering how much you'll spend on a home and how long you will live there, these costs are worth the peace of mind you'll get from being sure about this purchase.
Think of the option provision as a consumer protection. As a buyer, it gives you time to figure out just exactly what you're getting for your money. This small, nonrefundable fee also prevents the seller from selling the home to anyone else during the option period.
Benefits to sellers
While the seller may not be able to terminate a contract during the option period, there are some benefits for sellers who agree to the option provision. While the option fee may not fund an early retirement, it is still paid directly to the seller. How bad can a little extra cash be?
In addition, the option provision may help to ensure a smooth transaction. According to the National Association of Realtors®, only about one in 10 transactions don't make it past the option period. This could mean that if a potential buyer terminates the contract during the option period, it's likely the transaction would have caused you some headaches-at the least. In addition, you are a key player in the fee negotiations. While the option fee should be small enough to encourage buyers, both the amount and the timeframe are in your control.
If you're a seller who has agreed to the option provision, it doesn't mean that you have to stop marketing your property. You have the right to look at offers and even accept a back-up offer, pending the outcome of the original contract. So as a seller, there's no reason to hesitate when it comes to option periods.
Whether you're a buyer or a seller, it's important to remember that the option provision is a binding agreement. If you purchased an option to give yourself some time to evaluate a seller's property, contact the professionals immediately. A professional home inspection may take longer than anticipated. Failure to terminate the contract or waive the option provision within the negotiated timeframe could cause you to lose your earnest money.
Whether you're interested in buying your first home, your next home, or just want to know more about home-ownership in general, I encourage you to check out a couple of great online resources: http://www.texasrealestate.com/ or http://www.har.com/ and for all of your Pearland TX and Northern Brazoria and Galveston County real estate needs, please visit my site at http://www.danfrankrealty.com/. All of these sites offer tons of useful, real estate-related information geared specifically for Texans.
Danny Frank is a local Pearland TX Real Estate expert
My column was also published in the 08Feb09 edition of the Galveston County Daily News
