An amount of time, specified in a real estate purchase contract, where the seller grants the buyer an unrestricted right to terminate the contract. The buyer benefits from this option period by being able to conduct inspections & request repairs to be completed. The seller is paid an option fee for granting this right.
Key Points about Option Periods
- The amount of time is negotiated between buyer & seller and is specified in the contract. In Texas, the majority of contracts identify 7 or 10 days for this option period. The 7 or 10 days starts from when the contract is executed, the point of time when both parties fully agree to the contract.
- The unrestricted right is just that, unrestricted. The buyer can terminate the contract for ANY reason during the option period. It does not have to be the result of a specific defect identified in an inspection report. The buyer could decide they no longer like the color of the cabinets and they would have the right to terminate the contract within the option period.
- The buyer definitely would want to conduct their inspection during this option period. From the inspection report, the buyer can request repairs made to the home or request a reduced purchase price. The seller, however, is under NO obligation to make repairs or lower the purchase price. If the seller says 'No' to the repair requests, the buyer can not force the seller to make repairs. The buyer can only decide to continue with the purchase without those items being repaired or decide to terminate the contract.
- The seller MUST be paid money for granting this right to terminate. If there is no consideration (money), the option period is NOT valid nor legally enforceable. In Texas, the majority of contracts identify an amount between $100 and $250 paid for the option period. This consideration is called the "option fee".
- If the buyer exercises their right to terminate within the identified time frame of the option period, the buyer would be refunded their earnest money (earnest money will be described in another Definitions & Advice session). The option fee would NOT be refunded, however. The earnest money is typically more substantial (normally 1% of the purchase price, in Texas) than the option fee and therefore much more important for the buyer to have returned / refunded.
Terminating a contract during the Option Period is the most common way buyers legally terminate contracts and have their earnest money refunded. However, there are other periods of time specified in the contract or addendums where buyers are legally allowed to terminate the contract and receive their earnest money back. Some examples are:
- Financing Approval: The Third Party Financing Addendum specifies a period of time, typically 21 or 30 days, for the buyer to receive full approval for obtaining a mortgage to purchase the home. If the buyer can not obtain approval for a mortgage within the timeframe specified, they may terminate the contract and their earnest money will be refunded.
- Home Owners / Condo Owners Association: Buyers of homes or condos that are subject to mandatory associations and fees are allowed a period of time, specified in the contract or addendum, to terminate the contract based on inspection of the association documents. These documents will include information about the specific home & dues owed, the association & financial health and the rules & regulations owners are obligated to follow. If the buyer is not comfortable with any information provided within the documentation, they may terminate within the time frame allowed and their earnest money will be refunded.
- Lead Based Paint: If the home was built prior to 1978, it may have lead based paint and an addendum / notification is required. The buyer may decide to have a lead-based paint inspection and if lead-based paint is present, they may terminate the contract within the identified timeframe and their earnest money will be refunded.