We all know the feeling of angst that hits as we move closer to the barista at a coffee shop to order a morning java. If you don’t know what you want, the line disappears too quickly. Well, that angst multiplies 10 times when committing to a home purchase, and you’ll need extra time (and extra details) to feel confident in your decision. Just like you do about that oat milk latte.
Before inspections, you may fear the state of the home or the seller’s willingness to negotiate repairs if the home needs serious work. In the state of Texas, an “option period” allows a buyer to get these details before making the final choice. It means you can back out of the purchase if you’ve discovered something ugly or move forward with a home that’s been held for you during your decision-making. Keep in mind that option periods are specific to Texas and other states will have different processes that give buyers the time they need to make the final decision.
We researched the details and talked with an expert Texas real estate agent to help you make the most of an option period.
What is an option period?
An option period is a portion of time, agreed upon between buyer and seller, which permits the buyer to think on a purchase decision. This enables the buyer to terminate the sale at any point during the allotted time. “Any reason is valid to change your mind during an option period … the only thing we’re risking is our option fee,” shares real estate agent Jennifer Bacak, who sells homes 47% faster than the average agent in Bryan,Texas.
You may be unfamiliar with the term option period, which is understandable as the phrase is specific to the Lone Star State. However, other regions have similar processes that support the buyer’s decision. For example, states such as North Carolina and Georgia have a due diligence period that works in a similar way.
When does an option period begin?
The option period and fee are finalized in the purchase contract terms of the sale. A higher fee and shorter time frame might make the buyer’s offer more attractive to the seller, and sellers may ask for better terms which could extend the negotiation period.
The option period begins the day after the contract is signed, and both buyer and seller are contractually obligated to carry out those terms. The home will revert to “option pending” on the market and sellers can only accept backup offers during this time.
How much is a typical option period fee? Is this refundable?
An option period usually comes at the cost of a non-refundable option fee on the buyer’s side. A typical fee ranges between $100 and $500+, determined by the market and negotiated terms, and is due three days after the contract’s start date.
This fee makes the option period more worth a seller’s time. But don’t be confused – the fee is also a win for buyers whether or not they back out!
“The earnest money and the option fee are credited to you at closing,” explains Bacak for buyers who move forward. But for those who terminate, they only lose the option fee. The buyer would still receive back the earnest money deposit (EMD) placed down at signing, usually between 1% and 3% of the sale price.
If the buyer decides to back out of the sale after the option period because of a low appraisal (and the lender will not lend what is needed to purchase the property) or a financing issue, and the appraisal and financing contingencies have not been released, the buyer will still lose the option fee, but will be refunded their earnest money deposit. Financing contingencies and appraisal contingencies are separate from the option period — but the only way for a buyer to get the option fee returned to them, is if they close the sale, according to Bacak.
How long is a typical option period? Can it be extended for any reason?
A typical option period is anywhere between 1 and 10 days but is dependent on several factors. These factors include:
- Final negotiated terms between buyer and seller
- Conditions of the market (buyer’s market versus seller’s market)
- Type of inspections needed for the buyer to do their due diligence
The greatest determiner of the option period and fee is market status — a buyer might need to aim for a shorter option period in a seller’s market. “$500 for five days has become my go-to when I’m competing with other contracts and low inventory,” Bacak explains. Finding a buyer’s agent like Bacak will help you navigate these waters to make an attractive offer that also gives you the time you need to make your decision.
An option period can be extended if the seller agrees. Having a strong case for extension, such as needing additional time for a specialty inspection, is a good negotiation tool. But be warned: Every option period and extension comes at a price. You may need to pay a secondary option fee to get the seller to concede.
What should a buyer do during the option period?
The option period is crucial for the buyer’s process; it creates time for making one of the biggest decisions in a homeowner’s life. Buyers should make the most of the period and take every opportunity they can to solidify their decision to buy or terminate.
There are a few items to consider when negotiating the timeframe:
- Inspections: One of the key reasons behind an option period is to undergo home inspections! A professional inspector confirms that the home is in tip-top shape or points out items that need repair. You can use these findings to renegotiate terms, such as if the home needs a new septic system or roof.
- Specialty inspections: Speaking of inspections, another option period to-do is to order any specialty inspections that the property may need. Examples include HVAC system, chimney, or mold inspections. “Wood destroying insect inspections are crucial to Texas properties too,” states Bacak.
- Attorney reviews: Maybe you want an attorney to review the contract before you take any leaps. This is not always necessary but a smart move, especially for those who are completely unaware of how the homebuying process works.
“You can skip the option period, and that’s another way to make your offer appealing. But that gives me pause as an agent because it’s very risky,” Bacak shares. Every buyer deserves a few days to review the property and decide on the purchase — without risking too much financial loss.
What do sellers think of option periods? Will this affect my offer being accepted by a seller?
An option period favors the buyer much more than the seller. This is because it offers the buyers the security of being able to back out after signing the purchase contract. In a seller’s market, offers with option periods might lack a bit of appeal to a seller with a lot of interested buyers.
Texas’s option period is not mandatory and could affect a buyer’s offer being accepted as the seller could view it as inconvenient. A seller with multiple offers wants the best price in the shortest amount of time.
However, this doesn’t spell the end of your dream home journey. Utilize an agent’s expertise in negotiation, offer a short option period, and up your option fee. Bacak explains, “The more option money you put down, the better as it shows the seller you’re invested and won’t terminate.”
What happens if I decide to back out during the option period?
An option period means the buyer can terminate the contract during the agreed-upon time frame without any particular reason being given. If the buyer chooses to terminate, the EMD would be refunded, but the seller would retain the option fee.
Being careful with your offer is crucial in a hot market, and the option period gives you the space to reflect on one of life’s greatest decisions. “[The seller’s market] is making buyers do everything with haste. There’s going to be multiple offers, and to be the best, you need to move rapidly,” Bacak shares. This is where an option period becomes key — even if your choice is to back out of a sale, you’ll feel better having decided that on your timeline.
Working with a top buyer’s agent will help you make sense of option periods and all other things homebuying related — with HomeLight, you can find a top-rated buyer’s agent near you in as little as two minutes to start your journey to closing on your dream home.
Header Image Source: (Jeremy Doddridge / Unsplash)
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- "Option Period," Legacy Texas Title (May 2021)
- "What is an Option Fee in Real Estate?," Close Concierge (July 2021)
- "Hot Markets, Cool Practices," Texas Real Estate Center (August 2021)
- "How to Deal With Inspection Reports Provided to a Seller," Texas Real Estate Commission (May 2019)