The option period is at the beginning of the purchase contract period, but when does it start? How long does the option period last? What are the consequences for not acting quickly enough? We’ll answer all of these questions and more as we dive into the details of the option period.
The Beginning of the Option Period
“The option period starts at the beginning of the purchase contract period,” Amanda Mims, a realtor in the Cypress and Houston area of Texas said. She put it another way, “The option period begins the day after the effective date of the contract.” This means that, if all parties execute the contract on 7/12, the option period begins on 7/13.
How Long Should the Option Period Be?
The option period can be as long or as short as it needs to be to serve the purposes of the buyer and the seller. The number of days is negotiable but is usually anywhere from one to ten days, but can sometimes be up to 14 days. The average amount of time for an option period is usually closer to 10 days, which is usually just enough time for the buyer to set up an inspection, request repairs, and re-evaluate to ensure that repairs were completed before purchasing the home. (Note that the option period doesn’t refer to business days, but actual calendar days.)
Every buyer should request an option period unless they’re very experienced in real estate and can determine the condition of the home and its major systems (roofing, foundation, plumbing, electrical, appliances, air conditioning, heating, etc) for themselves. If a seller refuses to agree to a reasonable option period and there isn’t a high demand for the home, this should be a red flag that there are significant issues with the property. As a realtor, it would be beneficial to discuss the next steps with the buyer. If both parties are at an impasse, the buyer may choose to walk away from the contract at that point and look for a property elsewhere.
In order to begin an option period, the buyer pays an option fee. “The option fee must be delivered to the seller or listing agent within three days after the effective date of the contract or the buyer may lose their rights under the option period,” advised Lydia Blair, Escrow Officer at Allegiance Title Company in Dallas, Texas. If the option fee isn’t delivered within the allotted time, “then there is no option period.” That said, the seller may choose to accept a late delivered option fee, and “that action can ratify the option period. Talk to the title company attorney at that point,” she advised. If the seller chooses to reject the option fee, they need to immediately return it. “The seller can’t accept the option fee and then later argue that the buyer has no option period.” The option fee typically ranges from $100-$200.
Can I Get an Extension?
If there isn’t enough time within the option period to get everything done, both parties may agree to extend the option period. As with anything else involving the option period (the original option period, the amount of money the buyer pays for the option fee, and whether the money is credited back to the buyer at closing), the key is that both parties must agree. If the buyer needs more time, it is common practice to compensate the seller for the additional time. “An additional $10 per day, for example,” said Karen Sherrill, Realtor at Simien Properties in Houston. “This amount and the extension time frame would need to be completed on the amendment and signed by all parties prior to the expiration of the current option period.”
Ways to Speed Up the Option Period
A buyer’s contract can look more attractive when they request a shorter option period. An option period essentially puts the seller on the hook and unable to accept offers from other buyers, so shortening the option period can be advantageous on both sides. If a buyer needs financing, they can request a pre-approval letter to ease the seller’s mind about their loan-approval chances. Paige Donohoe, the Marketing Coordinator at Center Coast Realty in Chicago, advises that buyers get pre-approved as soon as possible. “Before you even start browsing listings, you’ll want to start preparing financially for the investment,” she said.
The inspection and appraisal can also be ordered as early as possible to ensure that there is time to negotiate repair costs and re-evaluate the purchase price of the property. Of course, the quickest way to speed up the option period is to offer cash for the property, but that is not always an option for buyers.
If the Buyer Wishes to Terminate the Contract
The point of the option period is to give the buyer the option to terminate the contract without losing earnest money. Of course, this can happen for a number of reasons (the seller didn’t make the needed repairs or the home appraisal came in under the asking price). If the buyer decides to terminate the contract, they must do so before 5 PM local time where the property is located. Even if the seller has agreed to make repairs (and begun to do so), the buyer may decide to terminate. The buyer may write their own termination letter or fill out a termination form (there are forms online for a generic Termination of Purchase Agreement letter and one specifically for Texas homeowners).
In Texas, “The preferred practice would be for a buyer’s agent to have a buyer who intends to exercise his termination option under the provisions of Paragraph 23 use the TREC Notice of Buyer’s Termination of Contract form and send the signed form to the seller at the address specified in Paragraph 21 or by facsimile as specified in that paragraph,” advised Texas Realtors.
Real estate laws vary by state, and “Real estate laws are ever-changing, either by legislative action or court decree,” so John A. Yoegel, author of Real Estate License Exams for Dummies. For that reason, he advises that everyone should research their state’s laws.
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