Buying a new home can be stressful, even more so for the buyer when they see their option period dwindling down as they experience delays. It’s stressful for the seller too – in fact, according to a Zillow report, 95% of sellers are stressed by at least part of the process of selling their home. If the option period ends, the seller has a right to walk away from the contract and move on to a new buyer – so what can you do to help buyers and sellers feel more comfortable? As a realtor, you can negotiate an extension to the option period. Here are some tips and tricks of the trade that can increase your chances of garnering a great response from sellers as you negotiate an extension.
Review of the Option Period
Let’s start with a very quick refresher on what an option period is. It’s a brief period of time (usually anywhere from 7-10 days) in which the buyer can terminate the contract and still get a refund of their earnest money deposit. During this time, the buyer can schedule a home inspection, review the report, and go over repair requests for the seller, request a concession, or negotiate a new sales price based on the findings. During the option period, they can’t sell the house, but they can take backup offers. In order to secure an option period, a buyer must pay a fee (usually $100, but it can be up to $200). The option period begins the day after the contract’s effective date and ends on whatever day has been pre-negotiated by the buyer and seller. If the buyer decides to walk away from the property, they must give the seller written notice of termination by 5 PM on the last day of the option period.
Both Parties Must Agree to Extension
The option period is all about negotiation. Everything from the option fee to the duration of the option period is negotiable. In order to secure an extension, more negotiation must take place. Sometimes the inspection report has a recommendation for a specialized inspection that won’t be completed and reviewed before the option period. In that case, the buyer’s agent needs to submit an amendment “extending the option period by enough days to allow for a second inspection and subsequent negotiations,” Frank Gray, top real estate agent and realtor in Spring, Texas said.
What If the Seller Doesn’t Agree?
If the seller doesn’t agree to make repairs or to extend the option period, there is not much left for the buyer to do but wait for the option period to end and seek housing elsewhere.
If the buyer suspects that the seller hasn’t upheld their end of the contract, however, the buyer can sue the seller for Specific Performance in cases where the seller is unwilling to carry out his or her obligations under the contract. When a court orders specific performance, the property is conveyed to the buyer in accordance with the terms of the contract. If the seller wishes to cancel the contract because they got a better backup offer, the buyer may file a Notice of Pendency to prevent the property from being sold during the lawsuit. This doesn’t usually apply to cases in which the option period is ending and the seller has chosen not to extend it. The buyer shouldn’t pursue this course of action unless they can prove that the seller breached the contract during the time that the contract was in effect. The buyer would also need to prove that they had the proper financing. Consult with a real estate attorney for more information.
If the seller has gotten the buyer to cancel the contract (and especially if the buyer has already sold their house in preparation to move into the new one), it’s customary for the seller to offer cash to pay for temporary housing.
Make it Worthwhile to the Seller
Legally, every negotiation should have a dollar amount attached to it. If you’re negotiating an extension for the buyer, he or she must also be willing to put up more cash. Frank Gray said, “Here’s the biggest mistake I see many agents make: failing to put a dollar amount on the amendment purchasing the additional option period.”
This is because of the legal principle in contracts called “valuable consideration.” This means that when someone provides something of value (such as an extension to the option period), there should be some reciprocal value provided to them. Texas Real Estate Commission (TREC) attorneys, in particular, are very clear that this requires a second financial deposit. Want to know how to extend the option period in Texas? You’ll need a second deposit to do it right. Without the additional deposit, “Most attorneys will declare the amount invalid – even if all parties sign it,” Frank Gray said, adding, “Your buyer loses all leverage to negotiate repairs!”
It’s in your best interest, (and the best interest of the buyer) therefore, to offer up something of monetary value to extend an option period on a home. Not sure how much to offer? Karen Sherrill of Simien Properties offered an example of “an additional $10 per day,” but the amount of additional compensation can be lower if the seller doesn’t want compensation.
What If the Seller Doesn’t Want Compensation?
Eric Holmes, Real Estate Agent in Fort Worth, Texas, put it this way: “It all goes back to consideration. The consideration for the additional time is the monetary amount. Zero dollars means zero consideration.”
Real Estate Broker Tom Polk added that “Many sellers don’t want to lose a buyer over a few days,” stating that they would probably even pay the buyer $10 to stay in the contract.”
There was a very lively discussion as to what to do in situations where the seller doesn’t want compensation on the Texas Real Estate website, with some realtors arguing that it should be unnecessary and others who argued for it. Stuart Scholer, a realtor in Austin, said it well: “What’s it going to be: semantics, or protecting your buyer’s right to the option? If you want to make sure you will be considered a competent agent, you’d better deliver $10 to the seller. If I have to deliver the fee myself, I’ll just pay $10 out of pocket. You can’t buy anything else with it anyway.”
As long as both parties agree to an extension of the option period, it shouldn’t be difficult to extend the option period. Remember, make it worthwhile to your seller by providing compensation to them, whether it’s $10 per additional day or $10 for the entire extension period.
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Sean started his career at the Boston Consulting Group, where he met his wife. They live in Chicago with their son, London. Sean graduated The Wharton School with honors.