What is the Option Period?

January 9, 2019

The option period is the buyer’s unrestricted right to terminate the contract.  Like most parts of the Texas One to Four Family Residential Contract (known as “the contract”), this is a negotiable item.  In the Texas One to Four Family Residential Contract, paragraph 23 on page 8 is titled “TERMINATION OPTION.”  This is the paragraph that applies to your option period.

To follow along with me, you can download a copy of “The Contract."

So, What is the Option Period?

The option period is a period of time that the buyer has to terminate the contract without penalty that they have purchased from the seller.  In the contract, it is called a termination option, which gives the buyer the unrestricted right to terminate the contract at any time within the prescribed amount of time that is agreed upon between the buyer and seller.

The buyer will typically use this option period to have the home inspected and negotiate any repairs that the buyer will want the seller to make in order for the buyer to move forward with the purchase.  The right for the buyer to back out of the contract is the buyer’s leverage on negotiating repairs with the seller.

Standard Option Period

The standard timeline for the option period is anywhere from 7-10 days. In certain circumstances, you may be able to negotiate for a longer option period, or the seller may require a shorter option period.  Typically it is difficult to get an inspector out to the house, get the inspection report back, get some bids, and negotiate repairs within a period shorter than 7 days.  However, this depends on the inspector’s schedule and efficiency as well as the buyers’ ability and willingness to move quickly.  Knowing the turn around time on a report from your inspector is important before you hire them to do your inspection.  

The length of the option period is the second blank in paragraph 23 of the contract.

The Option Period Costs Money

In order for the Option Period to be in effect, there needs to be a monetary exchange between the buyer and seller.  This is called the option fee can be any amount, however, there are expectations.  What you are doing as a buyer is asking the seller for them to take the home off the market to give you the right to inspect the home.  A seller will expect compensation for extending this courtesy to you.

The amounts for the option fee vary by location, demand on the home, price range, and the sellers’ desire.  Typically you can expect to pay the seller a $100 option fee for a 10 day option period.  Some sellers with a home in a high demand area may ask for an option fee of $200-250 for the same 10 day option period. 

Note in paragraph 23 of the contract that the buyer has 3 days to get this option fee to the seller or the seller’s agent.  If the option fee is not delivered by the end of the third day, then the option period is not in effect and the buyer does not have the unrestricted right to terminate the contract.  Don’t sweat it though.  Your Realtor will make sure that you adhere to the timelines in the contract.  

If you decide to move forward with the contract and purchase the home, the option fee is credited toward your cash to close amount (your down payment or closing costs).  However, there is a box in the contract that must be checked in order for this to happen.  This box is in paragraph 23 on the third line from the end.

If you decide to terminate the contract because you and the seller can not agree on repairs, or if you just flat out change your mind and terminate the contract, then you lose the option fee that you paid.  You do, however, receive a refund on your earnest money.

Option Period Time Calculation

In order to count the days for the timelines in your contract, know that day one is the day after the contract is executed, which means signed by all parties.  So, if both you and the seller sign the contract today, think of today as Day Zero, and tomorrow as Day One.  Count forward starting with tomorrow or Day One counting every day in the calendar.  Weekends and Holidays also count as days, so make sure you don’t skip any.  All of the other deadlines in your contract use this day counting method with Day One being the day after contact execution.

It is also important to note that your option period ends at 5:00 p.m. on the last day of your option period.  This is in the time zone where the property is located.  If you wish to terminate the contract, you must adhere to this deadline down to the second.

The Option Period Applies to Resale Homes

The option period typically only applies to resale homes.  If you are interested in purchasing a new home from a builder, you will not get an option period, especially if you are starting the new build from the ground up.  If you are buying a builder’s inventory home, or one that is already completed, you may be able to negotiate in an option period or due diligence period with the sales rep, but this is not common practice and will be a long shot.  When you have your new build inspected, the builder will fix or address any issues that the inspector finds, and you typically have a 1-2 year warranty, so an option period is not necessarily something that a builder will want to give to a buyer.

Most important part of the contract

The option period is arguably the most important part of the contract.  It gives you the opportunity to inspect the house for any damage that you don’t see, and it also gives you the opportunity to just change your mind.  Make sure that this part of your contract is filled in correctly before you sign it.  And as always, if you don’t understand the legalese in the contract, seek out a good real estate attorney that can explain it to you.

If you have any questions or comments, we would love to hear them.  Shoot us a message on our contact page. 

About the author 

Jack Allen

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