How long is option period? What should a homebuyer know?

Purchasing a home is a huge financial investment. And, every homebuyer wants to tread very carefully to protect themselves and their investment. That’s why it’s important to understand the contractual terms and conditions of a real estate transaction. In this blog, we’ll talk about an option period – the short window (for a change of heart) that buyers get – and how long is option period.

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What is an option period?

After a buyer and seller accept a real estate offer, the buyer gets an option period during which time, they can take a closer look at the new property to check for any major issues. If they see any red flags, they can terminate the contract. And, get their earnest money deposit back. 

While the term “option period” is prevalent in Texas, other parts of the United States understand it as due diligence on the part of a buyer. Sometimes, it’s referred to as the inspection period or contingency period.

How long is the option period?

Both the buyer and the seller agree on the length of the option period in the real estate contract. It’s generally one or two weeks long. This time is sufficient for the buyer to schedule a home inspection and resolve all doubts before moving ahead with the purchase contract. 

However, the exact duration of the period depends on the nature of the property. A house with complex systems such as a septic system, a swimming pool, or a well will take longer to inspect and hence will require a long option period. 

Keep in mind that a very long option period makes your offer less competitive. A shorter period appeals more to a seller. 

How much is the option period fee?

An option period is a sort of privilege for homebuyers – it gives them extra time to reconsider their home-buying decision. Therefore, they need to pay a fee to the seller for this convenience. Basically, the fee ensures that the buyer has the right to back out of a home sale for any reason during this time. 

The average option fees range from $100 to $500 – depending on the terms of the contract, where the property is located, and the number of days in the option period. 

The option money amount also depends on the real estate market. For example, an option fee can be as low as $100 in a buyer’s market or $300 to $500 in a seller’s market. 

Extending the option period (maybe for a specialized inspection or additional negotiations) will mean paying an additional fee. Do remember that the extension can only be made after a mutual agreement between the buyer and seller.

The option fee must be paid within three days of the contract’s effective date – unless the third day falls on a weekend or a legal holiday. In this case, the date will move to the next business day, ending at 5:00 p.m. local time. As soon as the period ends after the effective date of the contract, the home purchase is binding. 

What is the option fee vs. earnest money deposit?

A homebuyer in Texas has to pay both earnest money as well as option money. Let’s understand how they are different. 

Earnest money

This amount is essentially a security deposit that the homebuyer pays to the home seller to indicate a serious interest in buying a piece of property. 

The earnest money check is given to the title company and held in escrow till this period gets over. If the buyer, for any reason, cancels the contract during the option period, they’ll get back their earnest money. If the sale moves forward, the amount is transferred to the seller’s account. 

Generally, the earnest money is 1% to 5% of the home’s purchase price. 

Option fee

This is a smaller fee (usually 0.1% of the sales price) that the buyer pays to the seller in order to offset the latter’s inconvenience. You’re basically buying the right to enter the seller’s property and perform inspections before finalizing the real estate deal.

What are the advantages of an option period?

This period ensures that in case you have a legitimate reason to terminate your purchase contract, you’ll be refunded your earnest money deposit. And, except for the loss of your option fee, there are no penalties for canceling during the option period. 

If you’ve paid a fee for a seven-day period, you can walk away on day six if there’s a structural problem, wood rot, plumbing problem, or any other issue with the house. You will recoup your earnest money but the option fee is non-refundable.

What happens during the option period?

Most residential real estate contracts in Texas include an option period. The buyer can take advantage of this option to complete a few checks for their peace of mind. 

Some of these steps include:

• Home inspection by a licensed home inspector. The inspector will provide a detailed report on the condition of the property in question so that you can address them with the seller.
• Home appraisal by an appraiser. It’s usually ordered by the mortgage lender to assess the fair market value of the house. The appraisal value will determine how much money the loan lender is willing to lend to you. 

Based on the steps above, the buyer contemplates their decision – whether to back out for any reason or go ahead with the property sale proceeds as planned.

Key takeaways

• The option period’s main objective is to offer the buyer time to inspect the house before agreeing to buy it.
• How long is the option period depending o the property and the agreement between the buyer and seller? 
• During the option period, the buyer can back out of the contract and get a full refund of the earnest money.
• The option fee is non-refundable when buying a home.

An option period is a boon for buyers as it gives them a chance to inspect the home thoroughly, get the purchase contract reviewed by a real estate attorney, and get a home appraisal value before taking the final plunge. Most importantly, it gives them immense peace of mind.

Written by Ramona Sinha. October 12, 2022

Ramona is a content writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. An avid traveler, she’s a digital nomad at heart and an animal lover from the depths of her soul.