Real Estate: What Is An Option Period?

What is an Option Period? Here in Texas, an option period is a set number of days negotiated between a buyer and a seller which allows a buyer to terminate a contract without cause. This option to terminate is obtained by mutual agreement and the payment of an option fee. The amount of the fee is negotiable, and an experienced real estate agent can provide some advice and opinions to their clients about how much to propose.

This language related to the option period can be found on page 2 of the TREC Form 20-17, known as the Texas 1-4 Family Contract, in section 5B:

5B TERMINATION OPTION: For nominal consideration, the receipt of which Seller acknowledges, and Buyer’s agreement to pay the Option Fee within the time required, Seller grants Buyer the unrestricted right to terminate this contract by giving notice of termination to Seller within ________ days after the Effective Date of this contract (Option Period). Notices under this paragraph must be given by 5:00 p.m. (local time where the Property is located) by the date specified. If Buyer gives notice of termination within the time prescribed: (i) the Option Fee will not be refunded and Escrow Agent shall release any Option Fee remaining with Escrow Agent to Seller; and (ii) any earnest money will be refunded to Buyer.

Is An Option Period Mandatory? The simple answer is no. But we have never advised any client to waive theirs, even when the market was very competitive in 2021-2022.

What Is The Purpose Of An Option Period? In the definition above, the purpose is simple: To give the buyer a chance to terminate the contract within a set timeframe. This is typically when buyers will schedule their home inspections, and at times enlist other service providers like roofing companies, foundation repair companies, etc. to give a more detailed analysis of the property condition.

How Is An Option Fee Paid? Section 5A lays out how an option fee is paid. In most circumstances, a single payment including both an option fee and earnest money will be sent by the buyer to the Title Company, who will hold this payment throughout the process. Section 5A part 1 gives the buyer three days to deliver the option fee. A business day according to the contract typically ends at 5:00pm. However, special consideration is given to weekends and holidays. As a result, if the 3 days ends on a Saturday, Sunday, or Holiday, the deadline to deliver the funds is extended to the next business day (See section 5A part 2.)

What Happens To The Option Fee? If the contract is terminated, according to the contract, the option fee is paid to the seller. If the contract is not terminated, it is generally applied to the buyer’s contribution of funds at closing (Section 5B part 4.)