*** Updated 9-6-24
Howdy real estate investors! Here is an real estate insider trick of the trade. Use the option period in Texas and strategic use of option fees to protect yourself when either home buying or home selling.
Let us explain. The option period can play a significant role in bringing peace of mind to home buyers regarding the condition of the property during the homebuying process.
In this guide, we will delve deeper into the nuances of the option period and how to use option fees properly.
Option Period Meaning
The option period definition is a set amount of time that potential buyers and sellers alike agree to in a Texas real estate transaction where a sales price has been established but before any earnest money deposit has been made.
During this option pending time, the buyer can access the property with licensed inspectors to access necessary repairs and gives the right and enough time to terminate the real estate contract if previously un-discovered issues arise.
The potential buyers along with their real estate agent perform their own buying process due diligence like obtaining home appraisals, understanding the local housing market or neighborhood and in-depth home inspections (like roof, HVAC, sewer lines).
The true meaning and design of the option fee is simply to get to know the house and get the right home worth to make a fair offer to buy the home. The length of the option period and option fees vary but are spelled out in the real estate contract called a purchase sale agreement. In Texas, its called the Texas One to Four Family residential contract.
The property is considered “under contract” and the buyer now has the unrestricted right to buy the house. For the option fee, the seller can be paid directly but also can keep the option fee (and any future earnest money deposit) in an escrow account usually at a title company, which is usually non-refundable, as security during the option period term.
For whatever reason, the buyer can exercise the termination option to back out of the contract and keep their earnest money. During this time, potential house buyers should carefully examine the property during the contract period to determine its condition before making a final decision.
For first-time homebuyers, utilizing the option period and performing due diligence instead of just a prayer could save them from making expensive rookie mistakes. For example, our team has found numerous examples of houses for sale with undisclosed fire damage in the attic, leaking roof, mold damage (does the house smell like mildew?), and foundation repairs needed. These major issues are costly and need adjustment to any possible final sales price.
How Long Is Option Period In Texas?
With the option fee paid, a buyer in Texas has the opportunity to undertake a comprehensive inspection period of the property starting on the contract effective date, and then usually lasts between one and ten days. But, the final contingency period is up to the buyer and seller because an older house as compared to a new home might need much more buyer time onsite to perform their due diligence on the house.
Homeowners dealing with offers in a “hot” housing market scenario may decide to forego option periods completely. This occurred in the many areas of the DFW real estate market like Plano, Austin, Richardson, Arlington, and Grand Prairie in 2020 and 2021. During these hot housing market periods, a shorter option period of only 1 or 2 days with earnest money deposit required by the third day was often a regular occurrence. The buyers were often all cash home buyers. Yup, wild housing days indeed!
By accepting the property as is without any contingency periods or conditions and usually in cash, they are demonstrating their commitment to the offer and hoping to make the home sale process a shorter period of time usually with no closing costs to the seller which most agents would agree is very appealing to homeowners looking for a quick closing.
How Much Should Option Fee Be In Texas?
The average option fee from our experience is in $10 to $300 range in the state of Texas. The buyer pays this sum to the seller in order to secure the option period. During this time, the buyer has the opportunity to terminate the contract within the defined range without losing their earnest money payments.
Option Fee Refundable in Texas?
The contractual fee from a buyer is a non-refundable option fee at the end of the option period. The potential buyer purchased the right to have an unrestricted right to terminate the contract for a period of time as detailed in the purchase sales agreement.
How is Option Period Calculated?
The length of option periods in real estate transactions in the state of Texas is usually between one and ten days, depending on the parties involved. The purchase price sales agreement (usually a standard TREC contract) specifies the agreed upon duration to terminate the contract.
The buyer has the specified duration to inspect and appraise the property’s condition after the option period starts. An easy way to determine the option period is to use the number of days that both parties have agreed upon in the contract as described by the Texas Real Estate Commission (TREC).
Do weekends count in the option period?
Unless otherwise stated in the purchase price contract, weekends and any legal holiday are usually considered part of the option period in Texas, and not just business days. Once the real estate contract goes into effect, the number of calendar days that make up the option period begins counting down. This includes all days of the weekend and holidays. Buyers need to read the fine print of their contracts to find out things like the option period’s definition and any holiday or weekend exclusions.
What Happens to Option Fee At Closing?
It is common practice in the state of Texas to apply the buyers option fee amount against the purchase sales price when the deal closes. That sum represents a component of the buyer’s option money that went into the deal. If the buyer decides not to go through with the purchase while the option is still active, the option fee is a non refundable fee paid.
Case Study: Example of Option Period in Fort Worth Texas
Here is an example from our own experience. We have over 40 years of cumulative experience and performed over 2500 renovations, turns, and property acquisitions throughout Texas and Florida, so we can offer some insider tips on how to buy and sell real estate in Texas.
Specific to how best to use an option period to buy properties in Dallas Fort Worth area, we can recall just last month, when we represented an interested BRRRR real estate investor at a Fort Worth TX property.
The investor goes under contract to buy the house in June 2024 and negotiated a 10 day option period starting on June 15th, 2024 to exercise their option to purchase the property. The non refundable fee paid in this example is $200 to the homeowner as an option fee for the agreed upon period. The buyer has until June 25th at 5pm (last day) to perform their due diligence with their professional home inspector.
During that window of time, our team was asked to do a walk-through and give an overall assessment of value and cost to repair and renovate so the investor could secure financing and make projections for rental cash flow.
However, the buyer did not see the heavy water damage behind the walls and possible foundation repairs needed. This added an additional $33,000 to $40,000 to their baseline financial projects and now made the house not the right property to buy or at least without significant repair negotiations and a seller credit on closing costs.
Fortunately, with the option period still in effect, the buyer was able to terminate the contract. The homeowner kept the $200 option fee and house was back on market listed for sale.
This real estate deal in Fort Worth serves to demonstrate the chronology and practical implementation of an option period, but also how important and power of a real estate investor tool to save money and find profitable properties.
What Time Does Option Period End in Texas?
On the agreed-upon date in the purchase price contract, the option period usually ends at 5:00 p.m. local time in the state of Texas. The buyer has the opportunity to complete all necessary inspections and assessments by the agreed-upon deadline before deciding to move forward with the property purchase.
Difference Between Earnest Money vs Option Money
Earnest money is a act of good faith between buyer and sellers when negotiating a purchase contract for sale of a property. The deposit put down demonstrates the buyer is serious about the purchase contract. This money is held in escrow and applied to the purchase price of the home. Option money is more towards the negotiating stage of a real estate transaction. It is an additional fee paid to the seller in exchange for the right to terminate the contract unilaterally during a specific window of time. Option fees are a way for buyers to gain some flexibility as they perform their due diligence process.
Do You Need to Pay Option Money to Have an Option Period?
It is not required by law in the state of Texas to pay option money fee in order to set up option periods. A genuine consideration, even a small sum or a mere pledge to buy, can be enough to establish an enforceable option period, according to extensive case law. In most cases, though, buyers will pay the seller a fee in order to secure the option period, which shows that they are serious about the purchase.
Can A Buyer Back Out After Option Period in Texas?
Upon until the option period time ends (usually by 5pm), homebuyers still have the right to cancel and terminate the contract. There is a catch, though: when the buyer backs out, they will lose the option fee paid for the right to terminate the contract.
The transaction will proceed once the option period ends, and if the buyer fails to hold their side of the agreement without a good cause, they can lose their money unless there are clauses in the contract that permit the right to terminate and an additional option fee.
What Happens to Option Fee At Closing in Texas?
At closing, the buyer in the state of Texas often gets a seller credit for the option fee paid. That sum represents a component of the buyer’s money that went into the deal. The buyer can deduct the option fee they paid for the right to terminate from the total amount due at closing if they go ahead and buy the property.
How Do I Terminate My Option Period in Texas?
It is the buyer’s responsibility to provide written notice to the seller’s agent to terminate the contract prior to the agreed-upon deadline in order to cancel an option period in the state of Texas. In this written notice invoking their right to terminate the contract, the buyer should make it clear that they want to end the contract while the option period is still active.
Get in touch with a local Texas real estate expert like Bright Bid Homes if you need any more information regarding real estate deals in the Dallas Fort Worth metroplex and throughout Texas. Our mission is to create a delightful real estate experience for you from helping clients navigate the difficult DFW real estate market and make well-informed judgments at every stage. You can rely on our local realty knowledge to guide you through the intricacies of real estate transactions from option periods and option fees with ease and clarity.
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Disclaimer: The information provided in this article is based on the extensive experience of the author in the Texas real estate market. While every effort has been made to ensure accuracy, it is not intended as legal or financial advice. Readers are encouraged to consult with a qualified professional for specific guidance on their individual situations.