The "Option Period" - What Is It?

I have an Option, buy why's it capitalized?

If you've ever made an offer to buy Real Estate in Texas, you may have heard the terms "Option Period" or "Option Fee". So what is this "Option" all about? In Texas contracts, the "Option" gives a Buyer the unrestricted right to terminate the contract. This right is an important one for the Buyer in the contract as it allows them a specific period of time, measured in # of days, to decide whether or not to continue forward with, or terminate the contract. In order to secure this right in the contract, the Buyer must offer the Seller what TREC describes as "nominal consideration". In the case of the "Option Period", the Buyer offers the Seller an "Option Fee".

Nominal Consideration, tell me more?

Nominal Consideration simply means "minimal" or "insignificant" when compared to the actual or expected value of the item being purchased. In this case, the fee is a small portion of the overall value of the Real Estate being acquired. The fee may be "insignificant", but the rights it provides to a Buyer in the transaction are definitely not. The fee will be negotiated between the Buyer and Seller during the offer process and will be paid into Escrow along side the Earnest Money deposit (more about that in another post). While there is no "standard" in the market for how much a Buyer pays a Seller, we usually see between $75-$200 per day of Option in our contracts. As an example, if a Buyer wanted 5 unrestricted days to terminate, they may negotiate for an Option of 5 Days for $500 (or $100/day).

The Option Period

Once a Seller accepts a Buyers offer, a timer starts on the transaction. In Texas, that timer starts the day a contract is "executed", or signed by all parties. The day of signature is considered Day 0, and all subsequent days (including weekends) are counted from there. So a 5 day Option period from our example above would extend to 5:00PM local time on the 6th day after signatures were completed and the contract was executed.

Now that we have a better idea of what the Option Fee is, and how it is negotiated, let's talk a bit about why a Buyer would want an Option Period in their contract. First and foremost, the Option Period is critical if the Buyer wishes to have the home inspected AND have the ability to terminate the contract based on what they found. Without that period, the Buyer may still have the home inspected, but would be unable to exit the contract if they found foundation damage as an example. An Option Period can also be used to have other work done on the property. Perhaps the property sits in an area that is prone to flooding and the Buyer may want to have an elevation certificate completed, or the property could be located in an Endangered Species area and the Buyer wishes to have an inspection to verify whether that species exists on the property. As you can imagine, there are many reasons why the unrestricted right to terminate would be helpful to a Buyer.

What else should I know?

As with many other paragraphs of the promulgated TX Real Estate contracts, timing is important when it comes to Option Periods. In fact, Paragraph 5.E of the One to Four contract contains this detail: "Time is of the essence for this paragraph and strict compliance with the time for performance is required". "Time is of the essence" is a legal definition that requires strict adherence to the timelines set forth in the contract. We first run into this with the delivery of the Option and Earnest deposits by the Buyer. The contract states the Buyer must deliver the fees "Within 3 days after the Effective Date" of the contract. Recall from our example above, the day a contract is "executed" is Day 0. The contract then goes on to detail the time of the negotiated Option Period (ex. 5 Days) and instructs the Buyer and their Realtor? that notice about termination MUST be made on or before 5:00PM (local time where the property is located).

Delivery of the Option (and Earnest) deposits is also a source of confusions for Buyers and Sellers. Often times buyers mistakenly believe if they fail to deliver the Option deposit per the terms of the contract, they simply didn't really "enter into" the contract. Unfortunately, the contract language and legal precedents don't support this outcome. When a Buyer fails to deliver Option deposits on time (or at all), the Buyer is still under contract, but does not have the unrestricted right to terminate that contract.

As you can see, there's a lot to the Option Period and it can provide a significant right to a Buyer of Texas Real Estate. It's important for Buyers and Sellers to understand the Option Period and even more important to choose a Realtor? that can help educate you on the benefits and potential drawbacks of leveraging the Option Period in your contract.

If you're interested in learning more, feel free to email me at [email protected] or message me through LinkedIn.

About Jeremy:

Jeremy Bryant is the Founder of The Bryant Group with Keller Williams and has been serving residential real estate clients since 2020. Before transitioning to Real Estate, he held various sales, operations and leadership roles in corporate America for various technology companies.