The option money is essentially payment to the owner for the right to enter the property and perform any inspections or due diligence necessary within a specified amount of time. This check is made out to the seller, and the seller can cash it immediately.
- 1 How does option money work in real estate?
- 2 Does seller keep option money?
- 3 What is the purpose of option money?
- 4 Who gets the option money?
- 5 Is Option money part of purchase price?
- 6 Do you lose option money?
- 7 Does the option money go towards closing costs?
- 8 Can Options money be cash?
- 9 What is an option payment?
- 10 What happens after the option period?
- 11 What is an option deposit?
- 12 Option Money: What’s the Big Deal?
- 13 Option Fees Vs. Earnest Money: What’s the Difference?
- 13.1 What Is Earnest Money?
- 13.2 Option Fees Vs. Earnest Money: Key Differences
- 13.3 Method of Deposit
- 13.4 Cancellation Rights
- 13.5 Where Does the Money Go?
- 13.6 Differences in Refund Protocols
- 13.7 Considering the Best Method for You
- 14 What is an Option Fee in Real Estate? – Close Concierge
- 15 Option Fee in Real Estate
- 16 How Much Should the Option Fee Be?
- 17 When to Deliver the Option Fee
- 18 Where to Deliver the Option Fee
- 19 How to Deliver the Option Fee
- 20 What if the Buyer Wants to Terminate the Contract?
- 21 Conclusion
- 22 Write Option and Earnest Money Checks
- 23 OptionEarnest Money
- 24 Examples
- 25 Documentation for Option and Earnest Money
- 26 What’s the difference between earnest money and option money?
- 27 WHAT IS AN OPTION PERIOD AND OPTION FEE?
- 28 Blog – Option Period: What It Is and How It Affects Buying and Selling Texas Homes
- 29 Earnest Money vs. Option Money
- 30 How to Make Money With Real Estate Options
- 31 What Is a Real Estate Option?
- 32 Real Estate vs. Stock Options
- 33 Example of a Real Estate Option
- 34 Possible Scenarios
- 35 Special Considerations
- 36 The Bottom Line
How does option money work in real estate?
OPTION MONEY: What is it? Option money is a very important piece of a buyer’s contract. When a buyer pays an option fee they are purchasing the unrestricted right to cancel the contract in the time provided for in the contract.
Does seller keep option money?
A seller almost always deposits an option fee in his or her own account. An earnest money payment, by contrast, goes into an escrow account controlled by a bank or a real estate agent.
What is the purpose of option money?
The option money serves as an assurance for the seller that there is a considerable degree of certainty that the buyer will buy. It also serves as an assurance for the buyer that he can freely make up his mind without fear that somebody else might buy the thing.
Who gets the option money?
The option money is provided to the seller. Upon closing on the purchase of the house, the option money is typically provided as a credit to the buyer. The option money is non-refundable.
Is Option money part of purchase price?
What is an option money? The distinct consideration in case of an option contract. It does not form part of the purchase price hence, it cannot be recovered if the buyer did not continue with the sale.
Do you lose option money?
Here’s the catch: You can lose more money than you invested in a relatively short period of time when trading options. This is different than when you purchase a stock outright. In that situation, the lowest a stock price can go is $0, so the most you can lose is the amount you purchased it for.
Does the option money go towards closing costs?
The option and earnest money must come from an acceptable source of funds (i.e. not a briefcase of cash). Both amounts will be applied towards the buyer’s down payment and closing costs at closing on the Closing Disclosure (CD).
Can Options money be cash?
Earnest Money. The option money is essentially payment to the owner for the right to enter the property and perform any inspections or due diligence necessary within a specified amount of time. This check is made out to the seller, and the seller can cash it immediately.
What is an option payment?
An option or payment-option ARM is an adjustable rate mortgage with several possible payment choices. Some of the payment choices do not cover the full amount needed to pay down the loan. The payment “options” usually include: Paying an amount that covers both your principal and interest.
What happens after the option period?
Once the option period takes effect, the home’s status changes from “active” to “option pending.” Even though the seller can take a backup offer, they cannot sell the property to another buyer when the listing status is not active.
What is an option deposit?
Option Deposit means any payment of a cash deposit or delivery of a letter of credit in conjunction with a contract committing a seller to deliver title to all or a portion of a land parcel or finished lots, on specified terms.
Option Money: What’s the Big Deal?
What exactly is OPTION MONEY? In a buyer’s contract, option money is a very significant component. When a buyer pays an option fee, he or she is obtaining the unlimited right to cancel the contract at any moment throughout the period specified in the agreement. This timetable is designed to be used for buyer due diligence, and if the buyer discovers something that leads them to wish to cancel the contract, they may do so for any reason as long as the cancellation is completed within the specified time frame.
OPTION FOR TERMINATION: Seller grants Buyer the unrestricted right to terminate this contract by giving notice of termination to Seller within days after the Effective Date of this contract in exchange for nominal consideration, the receipt of which is hereby acknowledged by Seller, and Buyer’s agreement to pay Seller $ (Option Fee) within 3 days after the Effective Date of this contract, Seller grants Buyer the unrestricted right to terminate this contract by giving notice of termination to Seller within days after the Effective Date of this contract.
The following are the most important aspects to remember from this sentence:
- The fee must be received within three business days of the effective date of the agreement. If the monies are not received on time, there is no recourse available under the contract
- The buyer is obligated to pay this charge to the seller under the terms of the sentence. It may also be provided to the listing agent or broker who is acting as the seller’s agent
- It is conditional on the payment of the option charge that you have an unrestricted right to cancel till the defined timetable.
Unless otherwise indicated, notices under this paragraph must be made by 5:00 p.m. (local time where the Property is situated) on the day specified. A significant deal of disagreement existed in the past about when time the option period came to a close. The timing was 5:00pm local time, according to some, but it was midnight, according to others. TREC has now emphasized that a buyer must notify the seller of their intent to terminate their contract by 5:00 p.m. local time in order for the notification to be effective, which is good news.
- Because it makes it obvious that the choice is only accessible under the contract and that payment of the price is required, this statement is extremely crucial.
- Unless Buyer provides notice of cancellation within the time period specified, the Option Fee will not be repaid; however, any earnest money will be returned to Buyer in its whole.
- This sentence determines whether or not the buyer receives a credit for the option money at the time of closing.
- For this paragraph, time is of the importance, and careful adherence to the time limit for performance is necessary.
- When the wording “strict compliance” is used in a contract, it signifies that the contract’s terms must be followed to the letter in order to be fulfilled.
- The most frequently asked questions about Option Money?
In the event that your client is out of town, this is an excellent choice.
Q: We signed our deal on Thursday, and we’re excited about it.
A:The money for the option would be due on Sunday (you count Friday, Saturday and Sunday).
If the due date falls on a Sunday, the deadline for delivery is that day.
A receipt for this element of the contract is given to the seller or listing representative/broker.
Q: Is it possible to have option money paid to the title company?
Generally speaking, if the issue is “can” it be sent to the title company, the answer is “yes.” However, that response does not come without some level of accountability on the part of the buyer’s agent who is responsible for providing that option money.
As a result, even if a title business collects option money (and then turns around and transfers it to the seller), it does not constitute complete delivery of the option price as required by the agreement.
Neither the Texas Real Estate Commission nor the Texas Association of Realtors have emphasized the fact that buyer’s agents are responsible for delivering option money to the seller or the seller’s agent.
Q: What may happen if there is a flaw in the process of delivering option fee payments?
LET’S TAKE A LOOK AT A COUPLE OF SCENARIOS: Suppose, for example, that a deal is signed late Friday.
As soon as she arrives at the title firm on Monday, she hands over the earnest money and option money with a note stating that the listing agent will be responsible for the option cost.
Is there a time limit on this buyer’s option?
What might have been done differently in this situation?
Scenario Two: A contract is signed on Tuesday, and the following morning, the buyer takes the earnest money and the option money to the title firm, which closes the transaction.
Is there a time limit on this buyer’s option?
In this case, a wise seller would be able to claim that the contract was not fully adhered to and, as a result, the option period was not formed.
They most likely do not have the legal authority to terminate the agreement and retain their earnest money.
AGENTS: YOU AND YOUR CLIENT SHOULD BE PROTECTED The buyer’s agent should always require that the option money be provided directly to the listing agent or seller and that it be delivered within three days of contract completion when serving as a buyer’s agent in a transaction.
It is important to note that if an agent is the proximate cause of a client losing money (for example, if a buyer terminates and loses their earnest money because the option was not properly handled), TREC has ordered that the real estate agent personally refund the buyer for the amount of the forfeited earnest money owed to them.
Option Fees Vs. Earnest Money: What’s the Difference?
Both buyers and sellers might be perplexed by the real estate market, which can be frustrating. It is possible that realtors would submit various papers to both parties throughout the pre-closing procedure. An example of one of these papers is the one addressing option fees and earnest money. Because real estate contracts are written in complex language and technical jargon, it is possible that you have never heard of some of the terms used. Nonetheless, it’s critical to understand how the difference will effect your transaction’s outcome.
- What Is an Option Fee and How Does It Work?
- When purchasing a property, an option fee is a modest proportion of the entire purchase price that rarely exceeds $500.
- Option fees are intended to provide a potential buyer with sufficient time to arrange for safety and code inspections of the property that he or she plans to purchase.
- Due to the fact that option fees are typically paid over the table, the sellers instantly deposit the charge and seldom reimburse it at the time of closing.
What Is Earnest Money?
On the other hand, earnest money refers to substantial payments that a party retains in escrow until the closing date. The value of an earnest money payment will change based on a variety of circumstances, including the status of the housing market and the purchase price of the property or home being offered for purchase. As a general rule, you may expect an earnest money payment to be greater than an option fee by a factor of at least ten. The use of an earnest money deposit equal to 3 percent of the purchase price is not out of the question in particularly competitive real estate markets.
During the course of drafting a transfer contract, a buyer, a seller, and their respective agents hash out the details of these concerns.
Option Fees Vs. Earnest Money: Key Differences
The most noticeable, and one of the most essential, differences for prospective purchasers who are constrained for cash is the size of the property. Alternative fees may appear to be a more advantageous option for certain prospective homeowners than other types of costs. Given all of the extra expenditures associated with acquiring a property, including anything from paying for an inspection to meeting closing fees, it is tempting to save money wherever and whenever feasible.
In addition to these and other distinctions, prospective house buyers (and sellers) should take into consideration the following aspects when deciding between option fees and earnest money.
Method of Deposit
Almost often, a seller will transfer an option fee into his or her own bank account. An earnest money payment, on the other hand, is deposited into an escrow account, which is handled by a bank or a real estate agent on the closing day. However, while receiving a refund for an option fee once it has been deposited into the seller’s account is very difficult, you may be able to obtain a refund for your earnest money payment in slow real estate markets or in a deal when the seller is motivated.
Option fees only give unlimited cancellation rights for the duration of the agreed-upon period, which is typically ten days in duration. Earnest money payments, on the other hand, may grant cancellation rights that extend beyond the agreed-upon term in certain conditions, such as the ones listed below.
- The finding of lead-based paint in a residence built before 1978, as a result of a third-party examination or a legal disclosure
- Inability of the buyer to obtain finance for a purchase during the 30-day pre-closing window
- Unexpected limits or duties on the part of the buyer are revealed by HOA (homeowners association) paperwork that are sent to the buyer.
Where Does the Money Go?
With an option fee, the money is paid directly to the seller, usually after the seller accepts an offer on a house for which it was paid. Due to the fact that the money is sent straight into a seller’s personal account, it might be impossible to recover. An earnest money payment, on the other hand, is deposited into an escrow account until the transaction is completed. This implies that you may use it to pay for closing fees, a down payment, or even the cost of homeowner’s insurance after the end of the arrangement’s term of service.
Differences in Refund Protocols
In most cases, option fees are non-refundable after they are paid. You should think of them as a “good faith” payment to a seller, indicating that you intend to purchase a home if it passes an inspection first. The non-refundable deposit isn’t a deal breaker for most consumers because the quantities involved are minor in comparison to the overall purchase price. Alternatively, if you wish to seek a refund of an option fee, you can request that the seller apply the money to the closing costs. A seller who is motivated to sell may be willing to do so, but he or she is not obligated to do so.
In the event that a transfer contract fails due to major structural problems or other concerns with the home or property itself, you may be entitled to a full return of your deposit.
Your personal refund conditions are determined by the wording of your contract, so be sure you thoroughly check it with your real estate agent and that you understand its contents before signing it.
Considering the Best Method for You
Earnest money and option fees are types of real estate options that provide a buyer the exclusive right to acquire a piece of property. Purchasing the option to purchase a property means locking in the purchase price for a predetermined period of time, and the seller is prohibited from accepting any other offers until you exercise the option, regardless of whether the property has structural flaws, is in need of financing, or for any other reason. Despite the fact that option fees are less expensive than the other two alternatives, they are also less flexible.
When it comes to real estate, earnest money payments are more expensive, but they can be used to your closing expenses or offer you more leverage over the course of the deal.
Before making any purchase decisions, talk with your real estate or title agent about your alternatives and make sure you understand the differences. by CourthouseDirect.com Team on March 8, 2021 on the topic of Real Estate
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Is it clear to you what the distinction between earnest money and option money means? My clients in the Austin region frequently inquire about the distinction between option money and earnest money, which I am happy to explain. Once a buyer enters into a contract for a property in Austin or the rest of Texas, the buyer is required to furnish two checks. Both documents must be given in a timely manner, and they are commonly used in residential transactions in the state of Texas. Despite the fact that the option money is non-refundable, an experienced real estate agent, such as myself, will make certain that the contract specifies that the option money will be applied to the sales price if the buyer decides to proceed with the purchase while the option period is still in effect.
- This check is made payable to the seller, and the seller will be able to cash it right away.
- In the Austin real estate market, a decent general rule of thumb is that the option money should be one percent of the sales price, or one percent of the option money.
- This time begins the next business day following contract execution and ends at 5 p.m.
- Example: If you had a 7-day option period and the contract was signed on the 9th, the option period would expire at 5 p.m.
- When deciding when the choice period finishes, holidays and weekends are not taken into consideration.
- If the buyer decides to back out of the contract within the option period, he or she will only lose the money paid as option money as well as any money paid for inspections.
- Despite the fact that the house is legally still on the market, many Austin real estate professionals will not show homes that are under contract or have “waiting back up” status in the Multiple Listing Service.
The check for the earnest money is made out to the title firm that will be handling the sale, not to the buyer.
To put it another way, these are the sections of an offer where “money talks.” Buyers who send an earnest money check demonstrate a serious interest in and a willingness to acquire the specified property are referred to as serious buyers.
Using the $300,000 sales price from previously as an example, this corresponds to a $3,000 earnest money deposit check.
The title business is also responsible for “cashing” the earnest money check.
If the buyer decides to withdraw from the contract during the option period, the earnest money will be returned to the buyer in full.
In most cases, the earnest money is kept on account of the contract’s criteria being met within the timeframes stipulated by both parties after the option period has expired.
When a contract specifies that the seller must deliver the seller’s disclosure statement within 10 days of the executed date, and the seller fails to do so or delivers it on day 12, the buyer may terminate the contract and receive a refund of the earnest money, even if they are outside of the option period.
In a Texas real estate transaction, do you grasp the difference between earnest money and option money at this point in time?
If you have any more questions concerning option money or earnest money, or about real estate in general, please do not hesitate to contact me personally! Contact us through email at [email protected] or phone at 512-779-7597.
What is an Option Fee in Real Estate? – Close Concierge
In order for your client to be able to exercise their option period, they must first pay an option fee to the seller of the property. This is due to the legal principle known as “valuableconsideration” in real estate transactions, which governs the negotiation of real estate contracts. Because the buyer has requested that the seller refrain from accepting bids for a specified amount of time while inspections are conducted and offers are being considered, it is the buyer’s responsibility to reimburse the seller for their time.
This post has been prepared with you in mind; continue reading to learn more.
Option Fee in Real Estate
First, let’s go through the topic of option costs in greater depth. Option fees are paid after a contract is signed, and its purpose is to provide the seller with a period of time (generally between 7 and 10 days) during which they can terminate the contract and get a return of their earnest money deposit. Option fees are often paid in cash. The option fee is in the best interest of the buyer because earnest money deposits can range anywhere from $1,000 to $10,000 (depending on the value of the property).
If any problems are discovered, the buyer can request repairs, and the seller has the option of either making the repairs or refusing to do so.
How Much Should the Option Fee Be?
As previously indicated, a monetary value must be connected to the option fee in order for the option period to be legally enforceable. Option fees are typically priced between $100 and $200, however they can sometimes be as low as $100 or as high as $500. Because it represents such a small fraction of the total cost of your property, the amount of the option fee is frequently connected to the value of your home.
Will It Be Refunded?
Due to the fact that the buyer pays the option fee over the table, sellers deposit it instantly. However, if your buyer would like to make an exception to this regulation, this should be specified in the transfer contract before the option price is paid. The buyer might also request that the seller use the money to the closing costs. Sellers are not required to apply this sum to the closing, therefore it’s a good idea to inform the buyer of this fact in advance.
When to Deliver the Option Fee
It is the buyer’s responsibility to deliver the option fee within three business days of the contract’s effective date. If the deadline for delivering the fee occurs on a weekend or legal holiday, the deadline for delivering the fee is extended until the end of the next business day. The clarification came from Frank Gray, a top Realtor with Abby Realty, who stated, “Many agents are perplexed by this since they believe that all weekend days and legal holidays are excluded from counting the delivery days.” Consider the following scenario: the contract becomes effective on a Thursday, thus the agent considers Friday as day one, passes over Saturday and Sunday, counts Monday as day two, and counts Tuesday as the delivery deadline.
This is completely false.
Due to the fact that day three falls on a Sunday, the delivery deadline is on Monday instead. Unless there is an error on the part of the buyer’s agent’s part, and if the deadline is missed, the seller has the right to terminate the contract.”
Where to Deliver the Option Fee
The buyer is responsible for delivering the option money to the title corporation in Texas. The buyer can present the option fee check separately from the earnest money depositor, or the two checks can be delivered together as a single package (as a single payment). As soon as the funds are combined and allocated to one account, the option fee is deducted first, and the leftover monies are applied to the extra earnest money account.
How to Deliver the Option Fee
When it comes to delivery, physical delivery to the title company is the most typical way. Alternatively, the payment might be transferred through courier, wire transfer, or certified mail, depending on the circumstances. Buyers used to pay the option fee directly to the seller or seller’s agent, and they may even send cash using Venmoor or any similar platform in the past (before the amended TREC guidelines surrounding the option fee delivery stated inparagraph 5). Due to the low likelihood of title firms accepting that type of payment, you’d be better off using one of the delivery options listed above.
Receipt of Payment/Delivery
It’s critical that the delivery cost is paid on time in order to avoid any penalties. It should be noted, however, that the payment does not require a receipt (although that is helpful). You might be wondering, “If I don’t require a receipt for the payment, how can I show that it was sent at all?” You’re not alone. It is recommended that you obtain evidence of delivery for legal reasons. This can manifest itself in a variety of ways. Occasionally, all that is required of the buyer is a photograph of them handing over the cheque.
Another option is to place it in certified mail (or overnight delivery), which is a more secure method of delivery.
What if the Buyer Wants to Terminate the Contract?
No matter how emotionally committed a buyer is to a property, there are items that might come out during inspections that may cause purchasers to want to terminate the deal altogether. To cancel the contract, the buyer must notify the seller in writing by 5 PM on the final day of the option period, which is considered the last day of the option period. According to Kimberly Howell Properties, as long as the buyer follows these steps, they will be able to lawfully terminate the contract and obtain their earnest money back.
The buyer is not need to provide a cause for terminating within that time frame; they only must state that they wish to terminate.” It was put another way by Maha Chaudhry on her blog: “During the option period, the buyer is able to withdraw from the deal without penalty, whether it’s due to the seller’s refusal to budge during repair discussions, the inspection revealing serious flaws, or they’ve simply changed their mind.” On the other hand, the seller is not permitted to sell the house to anybody else during the option period, although they are permitted to accept backup bids.”
The option fee is a little and fair sum of money that is paid to the seller at the time of purchase (via the title company). In exchange for this charge, the buyer receives peace of mind while the house is being examined and negotiations are taking place. The buyer is protected from having their (much bigger) earnest money deposit forfeited if there are any faults discovered throughout the inspection process. The option fee can be supplied in a variety of methods, however it is recommended that the buyer have some kind of confirmation of delivery (though this is not required).
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Write Option and Earnest Money Checks
In order to proceed with the home financing procedure, the buyer will be needed to give option money and earnest money to the title firm once they have found a house and executed a contract. The option and earnest money must be provided by a legitimate source of funds that can be trusted (i.e. not a briefcase of cash). After the buyer has completed the Closing Disclosure, both amounts will be put to his or her down payment and closing fees (CD). Keep in mind that both funds are “at risk” until the transaction is completed.
The majority of home purchase contracts are drafted such that the transaction may be completed in 30 days or less. The contract specifies three separate deadlines for the completion of the project. The first is known as the option phase, the second as the finance period, and the third and final is known as the “let’s go ahead and do it” time. (Okay, so the last period isn’t officially known as anything. In this case, it is the period of time that occurs after the financing term has expired but before the close).
The option period is normally 10 days in length and offers the buyer access to the property for a variety of examinations, including the home inspection, before committing to the purchase. During the option period, the borrower has the right to quit the contract without giving any reason and get a return of the earnest money paid. In addition to being repaid their earnest money if they choose to terminate within the option period, the buyer is required to lose their option money to the seller.
Consider the option money as a mechanism for the sellers to get compensated for removing their property off the market while the buyer evaluates whether or not they eventually want to proceed with the purchase of the home.
The option money check will be made out to the seller and will be deposited in his or her account. The amount of option money normally ranges from $100 to $300, depending on the purchase price of the house being considered. Upon closing, the option money will be credited to the buyer’s account; however, if the buyer decides to cancel the contract, the option money will be forfeited by the seller to him. It should be noted that most new building loans do not demand any option money. They simply ask a down payment in the form of earnest money.
When the option time expires, the financing period takes over, and the earnest money is put at risk of being forfeited. If a buyer chooses to terminate the contract after the option time has expired, the seller will get both the option money and the earnest money that was paid to the buyer. In the event that funding cannot be acquired, the borrower is protected by the financing period. The funding term is usually between 20 and 25 days in length (starting from the date of executing the contract).
It is customary for earnest money to be around one percent of the purchase price (or $10,000 in the case of new construction). The earnest money, like the option money, will be credited to the buyer at the time of closing and can be used to help with your down payment or closing expenses.
Consider the following scenario: the option time has elapsed, and an appraisal indicates that the home’s worth is $5,000 less than the purchase price. In turn, this has an influence on mortgage financing and, depending on the borrower and/or loan program, may result in funding being made unavailable. At this point, the borrower has the option to terminate the contract and get a return of his or her earnest money, provided that the financing time has not ended. Another example would be if the borrower loses their employment before the loan is finalized and closed.
If, on the other hand, the financing time has elapsed, the worst-case situation occurs, and the borrower forfeits their earnest money.
Documentation for Option and Earnest Money
The mortgage industry will want copies of your canceled checks as well as a bank statement proving the cash have been transferred out of your account. We recommend that you inform us promptly if the cash were given to you or if you received a loan from someone else. Just so you know, if you’re purchasing new construction, be proactive and keep your bank statement showing the canceled check after the earnest money has cleared, because it might take six to eight months before you close on your home.
Please do not hesitate to email us the necessary paperwork.
What’s the difference between earnest money and option money?
The most significant distinctions between earnest money and option money are the amounts involved, the payee, and the refundability of the money. Although the amount of earnest money is negotiated between buyers and sellers, it is normally 1 percent of the sales price. When the earnest money is made payable to a title firm (again, a word that is agreed between buyers and sellers), it is transferred to the title business and put into an escrow account. When a home purchase is completed, the earnest money is used to the buyer’s down payment, closing expenses, and other prepaids.
- Option money is negotiated between buyers and sellers in the same way that earnest money is.
- The vendor receives the option money in exchange for his or her services.
- The choice money is non-transferable and non-refundable.
- If the buyer is unable to acquire financing within a certain time limit and notifies the seller of this, the earnest money is returned to the buyer.
All real estate is restricted to a certain geographic area. When it comes to the Spring Texas real estate market, the distinction between earnest money and option money stated above is important to understand. Take a look at these other resources:
- When does the option period expire
- Do you have to pay an extra option fee if you want to prolong the option period
- What is the cost of extending the option period
WHAT IS AN OPTION PERIOD AND OPTION FEE?
When purchasing a home in Texas, a buyer may elect to have an option period in exchange for a cost known as an option fee. During an option period, a buyer is given the choice to terminate a purchase contract for ANY REASON, or for no reason at all, up to the end of the period. A buyer gives a quantity of money to the seller in exchange for the seller’s “right to terminate for any reason.” The cost, which is referred to as an Option Fee, is provided at the moment the offer is made. The fee is collected by the vendor if the offer is accepted.
- Hire an inspector, look into mortgage options, look into insurance providers, look into home protection plans, look into new listings, and more.
A buyer and seller can agree on any number of days and any amount of money for an option period as long as both parties are in agreement. Example of a scenario: A seller receives $25 per day for a seven-day option period, for a total of $175. During the Option Period (the first seven days of the contract), a buyer has the right to have the house evaluated by a professional inspector. If repairs are recommended, a buyer can submit a repair list to the seller BEFORE the option period expires, allowing the seller to make the necessary repairs.
- If, during the option period, the seller is unwilling to negotiate on repairs or any other contingency, the buyer has the option to walk away from the transaction and terminate the agreement.
- An option fee is essentially a payment to the seller to remove a home from the market for a period of time, allowing a buyer to choose whether or not the home is “the one.” FAQ: Q: To whom does the Option Fee have to be paid?
- Q: Is it possible to pay with a cheque or money order?
- A wire transfer is almost certainly the most expedient method of meeting the deadline.
- Q: When will the Option Fee be sent or placed into my account?
- If the goods are not delivered by the agreed-upon deadline, the option period is no longer effective.
- As a result, if you do not send the Option Fee to your title firm within three days of the contract’s effective date, you will forfeit your right to terminate the contract for any reason.
Is the Option Fee refundable if I terminate the contract while I am still inside the Option Period?
Q: What is the option period?
Q: A buyer may request that the Option Fee be paid back to him or her at the time of closing and funding under the terms of the earnest money contract.
A: In no way, shape, or form!
Certified eXp University MentorVal J Aranda, REALTOR® “Coaching Texas home buyers and sellers since 1998” Val J Aranda, REALTOR® “Coaching Texas home buyers and sellers since 1998” This company is known as A Wonderful Life Real Estate Group.
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Blog – Option Period: What It Is and How It Affects Buying and Selling Texas Homes
When an Option Period is incorporated into a real estate contract, it provides the buyer with a certain number of days during which they can cancel the contract and get a return of their earnest money deposit. If a buyer is seeking for a mortgage, it is designed to allow them additional time to learn more about the house through independent inspections and appraisals, negotiate repairs and other issues in the contract, and to get approved for financing if they are looking for a loan. In exchange for this review time, the buyer pays a non-refundable fee to the seller known as an Option Amount.
- According to HAR.com, the Texas Real Estate Option Period is normally between one and ten days in length.
- local time on the designated end date.
- In Texas, the Option Period allows the buyer to terminate the contract for any reason without risking the loss of their earnest money, which is a significant benefit.
- It is understandable why the seller would want to minimize the number of days remaining in the Option Period as much as possible while still providing the buyer with the time to complete inspections.
How Does The Option Period Impact Buying and Selling Texas Homes?
For both buyers and sellers, the Option Period may be a stressful period of time. Buyers are pressed to arrange and complete their inspection as soon as possible, then wait for the results, obtain repair quotes, and discuss any concerns with the seller if they arise. The seller must wait patiently for all of this to take place, praying that nothing happens that may undermine the agreement. In this phase, the buyer has the opportunity to back out of the contract for a variety of reasons, including a concerning inspection report, difficulties obtaining financing, and a low appraisal value.
Following house inspection concerns (19 percent) and appraisal issues (14 percent), the National Association of RealtorsR reported that “issues linked to securing finance” accounted for 30 percent of the problems that cause contract settlement to be delayed (16 percent ).
One of the most effective methods to shorten the length of the Option Period is to eliminate as many of the factors that led to the necessity for an Option Period in the first place.
In a similar vein, you can order the inspection and request that your lender order the appraisal as soon as feasible after closing.
This guarantees that you receive the results immediately, within the option period, and that you have enough time to negotiate any repair expenses or to ask for a reduced purchase price if the appraisal comes in below market value.
In spite of the fact that a home inspection and report, as well as repair bids and discussions, might take several days to complete and so lengthen the length of the Option Period, house inspections are beneficial to you as a buyer. A thorough third-party inspection is something you should only do in exceptional circumstances. As a consumer, it is vital that you understand exactly what you are purchasing, faults and all. If there is a big problem that would need a considerable expenditure to resolve, you should factor that cost into your decision before signing on the signed line.
Are there signs of damage or poor condition that might compromise the structural integrity of the home, such as a fractured foundation, drainage concerns, or structural issues, for example?
Most of the time, the vendor is willing to work with you on the repairs.
In any case, it would be a mistake to purchase a property as-is without fully comprehending the situation you are entering into.
They are aware that you are in the midst of an Option Period and require additional time to work through their report, but even in that case, you should expect to wait 2-3 days just to receive the inspection report and possibly another couple of days to gather repair estimates in order to determine the cost of the repairs and whether they are worth negotiating with the sellers on your behalf.
Aside from the time required for the house inspection, the Option Period may also need to include time for the mortgage approval procedure and the appraisal by the bank. As reported by realtor.com, the full mortgage procedure, including pre-approval, house assessment and obtaining the loan itself, can take anywhere from 30 to 60 days, depending on the lender. In Texas, there is no Option Period that will allow for this amount of time. You may reduce this time by obtaining pre-approval for a mortgage before even entering into a house purchase contract.
Keep this in mind as we discuss the next problem that has the potential to lengthen the Option Period: the appraisal process.
In order for a lender to lend you money, the bank will need that you have your house appraised before they would offer you the money. Even if you perceive your home to be yours, it is essentially the property of the bank until you have paid off your loan. This is because they do not want to lend you more money than your home is worth, which necessitates the need for an evaluation. Although, like an inspector, the appraiser will inspect the property, they are not concerned with identifying damage or signs of wear and tear on the property itself.
- They compile a list of similar properties and then alter the price they believe your home will sell for depending on a variety of criteria, such as any amenities you’ve added to the property and the general condition of the home, before putting it on the market.
- Depending on whether the sales price exceeds the assessed value, you may be required to put additional money down in order to meet the lender’s down payment requirement.
- Assuming that this situation occurs and your appraisal is returned during your Option Period, you will be able to withdraw from the contract without forfeiting your earnest money.
- Obtaining an appraisal will be required if you obtain a loan to pay for the property, and you will not be able to obtain an appraisal until you have signed a contract to purchase the home.
If you are pre-approved for mortgage financing, you will still need to consider in the time required for appraisal when calculating how long you would like to keep your option period.
Reduce the Length of the Option Period by Buying Home with Cash
The option to remove days from your Option Period does exist, however: pay in cash. It is not necessary to apply for a loan and wait for approval if you are purchasing a property in Texas outright with cash. Because you do not have financing, you will not be required to obtain an assessment. Essentially, your Option Period must be long enough to allow for the completion of the inspection report and any further talks. Your contract becomes more competitive as a result of shortening the Option Period, as opposed to a contingent offer that requires financing, an appraisal, and a longer Option Period Making a down payment on a house isn’t quite so tough as it appears.
- They submit an all-cash bid on your behalf, and if it is approved, you will be able to move in while you sell your current residence.
- Upon the sale of your previous house, you will take out a mortgage on your new home and purchase the home from Homeward.
- With Homeward, you may significantly shorten the number of days remaining on your Option Period, acquire your next home before you sell your current house, and save up to 5 percent on the purchase price of your future home by making a cash offer.
- It is a win-win situation for both buyers and sellers.
Earnest Money vs. Option Money
Purchasing a home in Austin, TX is as simple as opening up “funk.com” on your smartphone and pressing the “purchase now” button. The next day, you pick up the keys and you’re finished. It’s like having Amazon Prime for your home! NOT! When it comes down to it, there are several moving elements to the house purchasing (and selling) process, as well as numerous terminologies to keep track of. It isn’t rocket science, but it is, or may be, difficult to understand. Unfortunately, I have been at a Holiday Inn Express, so I can assist in clearing up this mess!
- They are distinct from one another and certainly not equal.
- Among these is the ” Option Fee,” also known as ” Option Money,” which is a sum of money paid directly to the seller of real estate.
- In order to obtain a 10- to 14-day option period, you should offer $250-$300 for the same residence.
- You’re essentially purchasing, or paying for, the unfettered right to withdraw from the agreement at any time throughout the option term for ANY reason.
- It is possible to terminate your agreement and receive your earnest money (see the next paragraph for more information on this valuable asset) back with no questions asked if you do not want the property for whatever reason.
- There are no refunds for option money, and it is likely (but not guaranteed) that it will be added to the purchase price.
- Payment of this charge is made to the title/escrow business, which holds it as a deposit that is applied to the purchase price of the home in the following manner: In addition, this price is adjustable and, once again, is contingent on the circumstances surrounding your offer.
- Earnest money, for example, would be around $2,500 for a $250,000 property purchase.
- There might be a variety of reasons for this, but your Broker or Realtor® can assist you in navigating the process and answering any questions you may have.
- Don’t take anything for granted when it comes to the home-buying experience.
Option periods can also be extended, however doing so will result in the payment of a non-refundable consideration charge. There is no such thing as a free lunch!
How to Make Money With Real Estate Options
There are a variety of options for making a real estate investment. For many people in the United States, the most fundamental real estate investment is a family home or a piece of rental property. Investing in a single real estate property may be a significant and profitable investment with a variety of uses and a high return on investment. Single-family home investments are generally considered to be reasonably secure, dependable, and rewarding over the long term because of their versatility, durability, and appreciation.
Many loan-funding platforms (such as Lending Club, Prosper, SoFi), lending institutions (such as LendingOne), lending homes (such as Groundfloor), and money-management companies (such as Money360) provide buyers with more flexibility in their investment decisions by making it faster, easier, and more efficient to obtain a mortgage loan.
- Because of these new offers, real estate investors now have a diverse variety of options ranging from real estate investment groups to real estate mutual funds to real estate investment trusts to crowdfunded retail products such as Fundrise.
- Real estate options may be an option for these investors, and if they are exercised, they may be able to increase their profits while also reducing some of the risks associated with a direct real estate investment.
- Additionally, they do not often cover numerous units.
- The majority of the time, real estate options are employed in certain scenarios when a buyer will profit from having the option to purchase real estate but is not required to do so by the conclusion of a holding term.
- A real estate option is a legal provision between a buyer and a seller that has been specifically tailored to protect the buyer’s interests. Real estate options are negotiated between buyers and sellers, and are often designed to provide the buyer with the largest possible benefit. However, there are many other ways to design real estate option provisions. The most typical are holding period real estate option provisions.
What Is a Real Estate Option?
Direct real estate investments are subject to a number of particular concerns that do not apply as rigorously to the range of other real estate possibilities. These issues include: A real estate option, which is a clause of a contract to purchase a real estate property directly, may be a possible investment opportunity for interested or advanced investors. Real estate alternatives come with an additional layer of intricacy as well as its own set of factors that are distinct from one another. In general, a real estate option is a contract clause between a buyer and a seller that has been specifically tailored to benefit the buyer.
Purchase of the option to purchase or not purchase the property before the end of the holding period is made by the buyer.
Upon deciding to purchase the property (in other words, exercising the real estate option), the seller is required to sell the property to the buyer in accordance with the terms of the pre-existing contract, unless the buyer agrees to a different arrangement.
Real Estate vs. Stock Options
The notion of options may have been introduced to you when you were acquiring equities. Options offer a buyer with certain extra options depending on the underlying asset’s parameters, in addition to the underlying asset itself. Options, in general, can be exercised early, kept until expiration, or sold to a second buyer before expiration, depending on the circumstances. Commercial and high-end residential real estate choices are frequently employed by property developers and investors in commercial and high-end residential property transactions.
A real estate purchase contract agreement might have a plethora of prepared real estate alternatives that can be put into the deal.
- Option for a holding period: the buyer pays a premium for the right to purchase the property but is not compelled to do so
- Listing option: a buyer chooses to list the property in order to potentially profit from a markup on the price. Buyer pays a premium for the option to get a holding term, after which the buyer performs a like-for-like real estate property exchange at the time of purchase
- 1031 exchange option
The real estate option premium, negotiated holding time, and ultimate selling price are frequently the most essential components of a real estate option agreement that are negotiated over the course of the transaction.
Example of a Real Estate Option
In this section, you will get a thorough riskandreward analysis of a real estate option situation. Consider the following scenario: a builder has $500,000 and wants to acquire land that is offered for $2 million. The builder is unsure of a few things, including the following:
- Is it possible for the builder to raise $1.5 million through bank loans or other means? Is it possible for the builder to obtain the appropriate permissions for residential or commercial construction, as well as for future subdivision of the land? Is it possible for the builder to gather funds and secure licenses before another builder purchases the land?
An alternative to real estate is acceptable in this circumstance. The builder can sign into a real estate option contract with the seller for a set non-refundable sum (known as the real estateoption premium), such as $25,000, in exchange for the payment of the premium. In exchange for a real estate option, the builder agrees to hold the property sale price at $2 million for a minimum of six months. The following terms and conditions might be included in the real estate option contract:
- Property information (such as location, size, and other characteristics)
- The contract will be in effect for six months from the date of the agreement. Payment of the option premium or consideration money ($25,000 non-refundable payment paid in one lump sum by the buyer to the seller)
- And If the option is exercised within the term of the contract, the parties will have agreed on a purchase price ($2 million).
It is possible to have four different outcomes for the contract over its six-month term.
The bank has approved the builder’s application for a $1.5 million bank loan. He also assures that he will be able to secure the required development permissions. He exercises his real estate option to acquire the home at a predetermined price of $2 million, which he had previously agreed to. The seller obtains $2 million in addition to the $25,000 option premium that was paid to him.
Two months have passed and the builder has discovered that he will not be able to secure a building permit. A buyer for the home is found by the builder within four months, and the property is purchased for $2 million by another party. The builder offers the real estate option to the new party for a new price of $30,000, which is more than the previous price of $20,000. In the original option contract, the new party takes the position of the builder. Upon exercising the option, the new party obtains the property for $2 million from the previous party.
The seller obtains $2 million from the new party in addition to the $25,000 option premium received from the builder, for a total of $3 million. The builder sold the option for $30,000, netting him a $5,000 profit while avoiding the burden of owning a house he will never use.
The builder is merely an option buyer hoping to reap the benefits of the property’s price increase in the future. If the requested price of $2 million rises to $2.2 million in five months, the builder will benefit by exercising his option to acquire the property and reselling it at a profit to a third-party buyer. The property owner receives $2 million in cash, plus the $25,000 option premium, at the conclusion of the deal. From the sale of the property, the builder makes a profit of $175,000 on his investment.
The constructor is unable to get financing or building permissions. He has also been unable to locate any other potential customers. The builder chooses to let the option expire and forfeits the option premium in the process. However, by paying the $25,000 extra, the buyer was able to avoid making a potentially disastrous $2 million purchase (1.25 percent of the actual deal value). The seller receives $25,000 in compensation and continues to look for a buyer. A real estate options contract is in effect when a seller no longer has a choice as to whether or not to sell the property or at what price to sell it during the option holding term in all situations.
The seller, as a result, is entitled to receive and retain the option premium, regardless of the final decision reached by the buyer.
No financing or approvals can be obtained by the developer. In addition, he has been unable to locate any other potential purchasers. By letting the option lapse, the builder forfeits the option payment. Through the payment of a $25,000 premium, the buyer was able to avoid making a potentially disastrous $2 million investment (1.25 percent of the actual deal value). The seller receives a $25,000 profit and will continue to look for a buyer for the remaining time period. A real estate options contract is in force when a seller no longer has a choice as to whether or not to sell the property and at what price during the option holding term.
For the buyer’s choice to be reached, the seller must wait six months.
The Bottom Line
Real estate options provide a new and exciting way to trade, invest, and profit from real estate investments and investments. They may be seen of as a form of over-the-counter contract between two parties who are not related to one another. There is no exchange market for these sorts of options, but there may be terms in the contract that allow a buyer to sell the option while it is still in the middle of its holding period. In general, the parties engaged must make certain that the option contract conditions are properly written, fair, and adhered to by all parties participating in the transaction.
Real estate developers may gain by keeping a large number of real estate option contracts and only exercising a small number of them dependent on changes in the market throughout the holding term.
When significant changes occur during the holding term, such as the construction of a new busy roadway or an increase in crime, a contract holder may elect to renounce a previously agreed-upon option.