An Option Fee is a payment made by a Buyer to a Seller for the unrestricted right to terminate a real estate contract within a specified period, typically called the “Option Period.” In Texas, if you’re using the TREC 20-17 One to Four Family Residential Resale Contract Fee then Item 5A states that the Option Fee needs to be delivered within 3 days after the Effective Date or until the end of the last day that doesn’t fall on a Saturday, Sunday, or legal holiday.
How the Option Fee Works
The Option Fee is paid directly to the Seller by way of the title company at the time of contract execution or within three days after the Effective Date - meaning once it is received at Title, the seller is free to receive the Option Fee at any time. This fee grants the buyer an unrestricted right to terminate the contract at any time during the Option Period and for any reason. If the contract terminates during the Option Period, the Earnest Money goes back to the buyers, and the option fee, if not already claimed, is sent to the sellers.
How Much is the Typical Option Fee
The Option Fee, like everything else in a contract, is a negotiable item. In the Houston, TX real estate market for homes in the $250k to $1m range, the option fee amounts I typically see are in the range of $25 to $50 per day though we have negotiated option fees as high as $5,000 with had had discussions for higher amounts on other contracts, fees this high are unusual.
Is an Option Fee Refundable?
No. Simply put, when a Buyer “purchases” the unrestricted right to terminate the Option Fee is non-refundable, however, Item 5A4 of the TREC 1-4 Family Contract does state that the “…Option Fee will be credited to the Sales Price at closing…”, so it’s not a waste if the sale succeeds.
Importance of the Option Fee for Texas Sellers
1. Financial Security
The Option Fee provides a small level of financial security to sellers. Since the fee is non-refundable, sellers retain it even if the Buyer decides not to go through with the purchase. This can help offset some of the costs incurred during the time the property was off the market.
2. Attracting Serious Buyers
When a buyer pays an Option Fee, it’s a sign of their seriousness about the purchase. This helps weed out some non-serious buyers, ensuring that the seller’s time and resources are invested in potential transactions with a higher likelihood of closing successfully.
4. Flexible Selling Strategies
Sellers can adjust the Option Fee amount based on market conditions, using it strategically to attract buyers in different market scenarios. When the property is hot, they may be able to ask for more skin in the game - a higher Option Fee. This can help a buyer’s offer stand out more in a multiple-offer situation.
For Texas sellers, the Option Fee is not just a formal part of the real estate contract; it’s a strategic tool that brings financial security, ensures serious buyers, and provides leverage in negotiations. Understanding and strategically utilizing the Option Fee can significantly impact the success of selling a property in the Texas real estate market.
Frequently Asked Questions About the Option Fee
How Is The Option Fee Different From Earnest Money?
The Option Fee is typically a smaller amount than Earnest Money and is paid directly to the seller by way of the title company. It buys the buyer a specific period during which they can back out of the contract for any reason. Earnest Money, on the other hand, is a larger deposit that demonstrates the buyer’s commitment to the purchase and is usually held in an escrow account.
Is the Option Fee Refundable?
Generally, the Option Fee is non-refundable. If the buyer decides not to proceed with the purchase, the seller keeps the Option Fee. However, if the sale goes through, it’s often credited towards the purchase price.
How Long is the Option Period?
The Option Period length is negotiable and can vary, but it’s typically between 3 to 10 days. This period allows the buyer time to have the property inspected, review the inspection report, and negotiate repairs.
What Happens If the Buyer Backs Out During the Option Period?
If a buyer exercises their right to terminate the contract during the Option Period, they can do so for any reason. The seller retains the Option Fee, but the buyer is not obligated to proceed with the purchase and typically receives their Earnest Money back.
Can the Option Fee be Negotiated?
Yes, both the amount of the Option Fee and the length of the Option Period are negotiable between the buyer and seller.
Can the Option Period be Extended??
Yes, occasionally circumstances warrant extending the Option Period and once the length of the extension and the amount of the additional Option Fee has been negotiated it just takes an amendment to the contract and signatures by all parties to put the extension in place.
What Happens to the Option Fee if the Sale Closes?
If the sale goes through, the Option Fee is usually credited towards the purchase price at closing.
Is the Option Fee Mandatory in all Texas Real Estate Transactions?
No, it’s not mandatory but is commonly used in residential real estate transactions. It’s a matter of agreement between the buyer and seller.
How is the Option Fee Paid?
The Option Fee is typically paid by personal check, cashier’s check, money order, or wire to the Title company specified in the contract.