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What Buyers Need to Know About the Option Period

What Buyers Need to Know About the Option Period

Buying a home is probably one of the biggest decisions you’ll ever make. For that reason, it’s not a process that should be rushed.

Ideally, you'll need time to:

  1. Plan for independent inspections and appraisals
  2. Get estimates for repairs or revisit the contract
  3. Apply for financing if you're not yet pre-approved or approved to buy with a cash mortgage

Purchasing a house is an extraordinary financial investment, and a change of heart could significantly impact your finances. Understanding the contractual elements in a real estate transaction is important to protect yourself and your investment.

Here's everything you need to know about the option period and how it can help you.

What Is an Option Period?

An option period is a contractual term that gives the buyer an agreed-upon period to weigh their options before making a binding decision. It provides security for the buyer by giving you the chance to terminate the purchase contract for any reason whatsoever without risking your good faith deposit.

How Does an Option Period Work for the Buyer and Seller?

The term “option period” is specific to Texas. Other states use different terminology to refer to this period of time:

  • Colorado: contingency period
  • Florida: inspection period

Once the option period takes effect, the home's status changes from "active" to "option pending." Even though the seller can take a backup offer, they cannot sell the property to another buyer when the listing status is not active.

As a buyer, the option period allows you to include contingencies in your offer and address any concerns you might have before finalizing the contract.

Does It Cost Money to Get an Option Period?

Typically, you must pay a fee to set up an option period. The non-refundable fee is paid to the seller (usually about $100). Both the option period’s fee and duration are negotiable. Like the Earnest Money Deposit, this fee is a show of good faith meant to demonstrate that you’re serious about the purchase. It also compensates the seller for their time as you do your due diligence on the house.

How Long Does an Option Period Last?

During this period, which can be 7–14 days depending on the contract terms, you can schedule home inspections to ensure that the house is in good condition. The inspection will also yield estimates for any repairs, which you can use to renegotiate the home’s sales price.

If the inspection uncovers serious issues or the seller won’t budge on the contract terms, you’re free to walk away from the sale without any repercussions—you’re allowed a change of heart. Another point of security is that the seller cannot make any other deals during the option period.

The option period can also be extended for an agreed-upon number of days. As the buyer, it's important to note that the option and extension fees are more than a symbolic gesture. You must offer something of value if the option and extension periods are to be legally enforceable. Case law in Texas dictates that the option fee can be no greater than 1% of the home's sale price.

Bottom Line About Option Periods

The home buying process can be overwhelming—even more so if you rush through it. The option period is a small but critical part of the home-buying process. With so many factors to consider and so much money at stake, the option period is a great way to protect yourself. It gives you the right to terminate the contract without losing your Earnest Money Deposit.

Don't overlook the importance of the option period. You don't want to end up with a house that's not worth the value you paid.