What Is an Option Fee? Definition, Explanation, 10+ Facts

A buyer may choose an option period in exchange for an option fee in a Texas residential real estate contract. Continue reading to learn all you need to know.

What Is an Option Fee?

A buyer pays an option fee to a seller in the context of a real estate transaction. In exchange for the money, the buyer receives the right to withdraw from the transaction during a specified time period, even though he or she has formally agreed to the sale.

Almost exclusively exclusive to Texas is the usage of an option fee. The establishment of the option fee in Texas stems from the fact that the Texas Real Estate Commission, a state agency, created a standard form for most real estate transactions.

What Is an Option Fee?

By default, these forms include provisions for an option fee. Neither the option fee nor the commission forms are required, but they are commonly utilized as a matter of routine.

How Much Should the Option Fee Be?

As noted previously, in order for the option period to be legally enforceable, the option fee must include a monetary value. Typically, option costs range between $100 and $200, however they can cost as much as $500 or as little as $100.

The amount of the option fee is typically proportional to the value of your home because it represents a modest fraction of its total price.

Will It Be Refunded?

Since the option cost is paid at the table by the buyer, the seller deposits it instantly. If your buyer wishes to make an exception to this provision, it must be specified in the transfer agreement prior to payment of the option price.

The buyer may also ask the seller to apply the sum to the closing. Consider informing the purchaser that sellers are not required to apply this sum to closing.

When to Deliver the Option Fee

The buyer is required to deliver the option money within three days of the contract’s effective date. If the final day to deliver the fee falls on a weekend or legal holiday, the deadline is extended until the end of the following working day.

Frank Gray, a top real estate agent with Abby Realty, said, “Many agents are perplexed by this since they believe that all weekend days and legal holidays are removed from the delivery day count.

If the contract’s start date is a Thursday, then the agent will treat Friday as day one, skip Saturday and Sunday, count Monday as day two, and set the delivery deadline for Tuesday. This is not the case.

If the effective date is a Thursday, the first day is Friday and the second day is Saturday. Since day three falls on a Sunday, the deadline for delivery is Monday. If this is misunderstood by the buyer’s representative and the deadline is missed, the seller has the right to cancel the contract.”

Where to Deliver the Option Fee

In Texas, the option fee must be delivered by the buyer to the title company. The buyer may submit the option fee check separately from the earnest money deposit or together with the latter (as a single payment).

What Is an Option Fee?

If the buyer combines the amounts, the funds are first used to the option fee, and then the remainder is allocated to the additional earnest money.

How to Deliver the Option Fee

Hand delivery is the most prevalent mode of distribution to title companies. The payment could also be sent via courier, wire transfer, or registered mail. In the past, buyers paid the money directly to the seller or seller’s agent, and may even send payments using Venmo or a similar service.

Receipt of Payment/Delivery

The delivery cost must be paid on time. The payment, however, does not require a receipt (although that is helpful). You may be wondering, “If I don’t require a receipt for the payment, how can I confirm that the item was delivered?” For legal purposes, it is prudent to have proof of delivery.

This might manifest in numerous ways. Occasionally, it is sufficient for the buyer to simply take a photo of the check delivery. The receipt from the courier will likely suffice as proof of delivery for purchasers who sent the item by courier. You might also send it by certified or overnight mail.

What if the Buyer Wants to Terminate the Contract?

Regardless of how devoted a buyer is to a home, inspections may uncover issues that cause them to wish to terminate the contract. The buyer must provide written notification to the seller by 5 p.m. on the final day of the option period if they wish to terminate the contract.

According to Kimberly Howell Properties, as long as the buyer complies with this condition, the contract can be legally terminated and the deposit returned. “It grants the purchaser the unlimited right to terminate the agreement.

The buyer does not need a justification to terminate within the specified time frame; they simply need to state their desire to do so.  Alternatively stated by Maha Chaudhry on the Orchard blog:

“During the option period, the buyer is free to walk away from the sale without penalty, regardless of whether the seller refuses to budge during repair negotiations, the inspection reveals severe problems, or they’ve simply changed their minds. The seller cannot sell the property to anybody else during the option period, but they can still accept backup offers.

What Is Earnest Money?

Earnest money, on the other hand, involves significant deposits that are held in escrow until the closing. The value of an earnest money deposit fluctuates based on a number of variables, such as the status of the housing market and the purchase price of the property or home.

In general, you can anticipate that the earnest money payment will surpass the option cost by a factor of at least 10. In incredibly competitive home markets, an earnest money deposit of 3% of the buying price is not unheard of.

A buyer is permitted to request a refund of his or her earnest money deposit, although this is not a legal obligation. During the drafting of a transfer agreement, a buyer, a seller, and their respective agents resolve these matters.

Option Fees Vs. Earnest Money: Key Differences

Size is the most evident and significant distinction for cash-strapped prospective customers. Some prospective homebuyers may view option fees as the superior alternative.

Given all the other expenditures associated with acquiring a property, such as inspection fees and closing charges, it is tempting to save money whenever feasible. However, prospective home buyers (and sellers) should examine the following additional distinctions between option fees and earnest money:

Method of Deposit

Almost always, the option fee is deposited into the seller’s account. An earnest money payment, on the other hand, is deposited into an escrow account managed by a bank or real estate agent.

While it may be nearly hard to request a refund for an option fee once it has been deposited into a seller’s account, you may be able to obtain a refund of your earnest money deposit in slow real estate markets or in transactions with motivated sellers.

Cancellation Rights

Option fees only grant unfettered cancellation rights for the agreed-upon term, which is typically ten days. In contrast, earnest money payments may grant cancellation rights beyond this agreed-upon period, as in the following instances:

What Is an Option Fee?

  • After a third-party examination or legal disclosure, the finding of lead-based paint in a home constructed prior to 1978.
  • The inability of the buyer to obtain finance during the 30-day pre-closing period.
  • The distribution of HOA (homeowners association) documents that expose unanticipated buyer limitations or duties.

Where Does the Money Go?

With an option fee, the money is typically paid immediately to the seller once he or she accepts an offer on a home. Since the money goes directly into the seller’s personal account, it can be difficult to retrieve.

On the other hand, an earnest money payment is placed in an escrow account. This means it can be utilized for closing fees, a down payment, or even payment of homeowner’s insurance at the end of the arrangement period.

Differences in Refund Protocols

Generally speaking, option costs are nonrefundable. You should see them as a “good faith” payment to a buyer indicating that you intend to purchase a house if an inspection is successful.

The non-refundable deposit is not a deal-breaker for the majority of buyers due to the little amounts involved. If you wish to request a refund of an option fee, you can ask the seller to apply the amount to the closing. A motivated seller might be agreeable to this, but they are not compelled to.

On the other hand, earnest money deposits routinely apply to escrow. You may be entitled to a full refund if a transfer contract fails due to major structural flaws or other problems with the home or property.

Those who withdraw funds from their own accounts may be eligible for partial returns. Your personal refund contingencies depend on the wording of your contract, so check it carefully with your real estate agent and make sure you completely comprehend its provisions.

Considering the Best Method for You

Options on real estate, such as earnest money and option fees, provide the buyer the exclusive right to acquire a property. Once you “purchase the option” to buy a property, you lock in the purchase price for a certain period of time, and the seller cannot accept other bids until you revoke the option, whether for structural defects, lack of financing, or any other reason.

Option fees are the less expensive alternative, but they are also less flexible. Option payments are non-refundable and cancellation rights are restricted to a predetermined time period. Earnest money payments are more costly, but they can be applied to closing costs or used to increase your bargaining power in a real estate deal.

Your choice of purchasing method will depend on your individual requirements, the type of property you wish to acquire, and your financial resources. Before making any purchasing selections, you should discuss the options with your real estate or title agent and understand the differences.

What to Include in an Option to Purchase

A lease or rental agreement may include an option to purchase as a set of clauses or as a separate document. No matter the structure, an option to purchase must include the following elements:

1) the option fee

2) the term of the option period

3) the price at which the tenant would purchase the property in the future

4) compliance with local and state laws.

The Option Fee

The option to purchase must be granted in exchange for consideration or value for the contract to be legally binding. Although the value of an option contract cannot be trivial, there is no specific minimum or maximum; landlord and tenant negotiate the amount.

What Is an Option Fee?

The option fee can range from few hundreds to several thousands of dollars, depending on factors such as the home’s price. In general, option costs are non-refundable. In other words, the tenant forfeits the option money if he or she chooses not to exercise the option to purchase the house within the specified time frame.

In addition, the option fee is typically forfeited if the renter defaults on the lease by failing to make timely and accurate rent payments or by breaching a provision of the lease (such as housing pets when pets are prohibited). The option fee is subtracted from the purchase price of the home by the landlord, who deducts the option fee from the house’s principal.

The Duration of the Option Period

The term of the option period must be stated clearly in an option-to-purchase agreement. There is no precise or preferred unit of time, and alternative time spans range from months to years. However, option durations often range from one to five years in the residential environment.

The renter may exercise the option to purchase the home at any point during the option period or on the date indicated in the option-to-purchase agreement, depending on the terms of the contract. If the tenant fails to exercise the option within the allotted time, it expires and becomes void. In such a case, the tenant will forfeit the option fee.

Purchase Price of the House

The price at which the tenant will acquire the rental property in the future must be specified in an option to purchase. Occasionally, the purchase price is a fixed amount established by the home’s current appraised value.

The price at which the tenant will acquire the rental property in the future must be specified in an option to purchase. Occasionally, the purchase price is a fixed amount established by the home’s current appraised worth.

This strategy is not always prudent, however, as the longer the option time, the greater the chance of shifting house values. Consequently, when longer option periods are stipulated, landlords and tenants commonly agree to periodically reevaluate the home’s purchase price.

Alternativamente, el propietario y el locado pueden acuerdar el valor real de la casa mediante la evaluación de la casa al momento de la e Ultimately, the option contract is enforceable so long as both parties agree on how the house’s worth is to be calculated.

What Is an Option Fee?

Regardless of how the property’s value is established, it will likely be reduced by a percentage of monthly rent payments. This is the case because an agreed-upon percentage of the monthly rent is normally deposited into an escrow account under an option contract.

The landlord then either retains the escrow money and returns them upon the tenant’s home purchase, or simply puts a portion of the rent payments to the house’s principal. Throughout the length of the lease, the tenant thereby accrues equity in the property. If the tenant does not purchase the property within the option period, these funds are forfeited.

Adherence to State and Local Laws

Some state laws protect renters from entering into contracts they do not comprehend, for instance, by requiring option contracts to have conspicuous language in a particular font size, to notify tenants of the danger of losing the option fee.

To be effective and enforceable, an option to purchase must adhere to the subtleties of state (and local, if applicable) laws governing the transaction. Consult with your state’s real estate department to determine whether any applicable laws apply to your option to purchase deal.

FAQs Option Fee

What is the deadline for delivery of the option fee to the title company under the revised forms?

The option fee must be delivered to the title firm within three days of the contract’s effective date.

May the buyer deliver the option fee together with the earnest money?

Yes. Option fee and earnest money may be paid separately or all at once. The given amount will be applied first to the option fee, then the earnest money. Any residual monies will then be allocated to additional earnest money.

What Is an Option Fee?

Will the seller have to wait until closing to receive the option fee from the title company?

No. According to the new forms, the buyer permits the escrow agent to release and deliver the option fee to the seller at any time, without additional notice or approval from the buyer, and releases the escrow agent from liability for delivering the option price to the seller. At closing, the option fee will be credited to the purchase price.

Note, however, that any payment may be contingent on the escrow agent’s receipt of approved money. Before disbursing option fees, Texas Department of Insurance-regulated title companies must comply with “good funds” regulations.

Conclusion

The option fee is a modest and fair sum given to the vendor (via the title company). This cost offers the buyer with peace of mind during the house inspection and negotiation process. It safeguards the buyer’s (much higher) earnest money deposit should any concerns develop during the inspection procedure.

The option money can be provided in a variety of ways, but it would be prudent (though not required) for the buyer to have some sort of proof of delivery. If the buyer desires to terminate the contract based on the results of the option period, they may do so if they do so in writing by 5 p.m. on the last day of the option period.

If you require further assistance with the transaction process, Closure Concierge can handle everything from contract to close. Our savvy transaction coordinators ensure compliance while saving you time, allowing you to secure new contracts (and close more sales)! Contact us immediately for additional details.

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