Termination Option or Option Period

July 15, 2020

In my last post I explained the Earnest Money deposit and this week I want to explain the Termination Option and fee that accompanies it.  

So you’ve found the perfect house and your offer has been accepted, YAY!!!  Your agent has told you that he/she will need two checks from you.  One made payable to the title company for your earnest money and the second to be made payable to the seller of the home for option fee, but what is it exactly?

When you purchase a home, it’s always a good idea to have a home inspection.  This is very important and needs to be done immediately.  Your inspection period is at the beginning of your contract period and is part of the contract.  You are offering the seller of the home a nominal fee to take their house off the market for you so that you may have your future home inspected.  

The fee is not set nor are the days allowed for the option period, but your agent will advise you on the best practice for this part of the contract.  I recommend that you offer in the ballpark of .001% of the offer price of the home for the option fee.  An example of this would be $300 on a $300,000 contract.  

I also recommend that you keep your option period days down to 5 if at all possible.  This is for a couple reasons. For one, if you keep it short, it shows the seller that you mean serious business.  You should have no problem finding a home inspector to get it done in that amount of time so that you can get your report and determine what repairs, if any, you want to ask for.  

The second reason for the short option period is so your lender can order the appraisal as soon as possible.  Sometimes when a home inspection is done, the buyer might change their mind about buying the home, so it doesn’t make sense to pay for the appraisal if you change your mind. 

It’s very few and far between that I have a contract termination in the option period over an inspection and repair negotiations, but it does happen and that’s the purpose of the termination option.  So you’ve had the inspection and most everything was fine, but there are items that you and your agent feel need to be taken care of by the seller.  Your agent will submit a repair amendment asking for these items.  Should you and the seller not agree on repairs, or should you decide to walk away without asking for repairs, as long as you are within the timeline of the contract, you can terminate and get your earnest money deposit back, walk away with your only money out of pocket being the option fee and the cost of the home inspection.

The option fee is not refundable.  Again, this is your offering to the seller to take their house off the market for you to do your due diligence.  If the contract does close, this fee will be credited back to you towards your cash to close, just like your earnest money deposit.

If you do not follow the timeline in this paragraph of the contract and terminate after the option period, you will not be able to get your earnest money back.  TIME IS OF THE ESSENCE!!  

So let’s say you have the 5 days, your inspector gets your inspection done on day 1 or 2, but you are trying to negotiate these repairs with the seller and the seller wants more time to think it over.  You can do an amendment to the contract to extend your option period if all parties agree.  

This paragraph is to protect you, the buyer, and should be utilized!  

Musical Pairing: The Money Pit, “The Heart Is So Willing” ~ Stephen Bishop