What is the option period in Texas, and how does the option fee work?

Where does the option period come from?

Paragraph 5 of the TREC One to Four Family Residential Contract (Resale). That’s TREC’s standard contract for resale homes. The paragraph is called Earnest Money and Termination Option.

The seller gives you the unrestricted right to terminate within a set number of days after the Effective Date. Unrestricted means you don’t need a reason. You don’t have to point to an inspection item. You just send notice in time.

The number of days and the fee are negotiated. The form doesn’t set either one.

How does the option fee work?

Here’s what the contract says:

• You deliver the option fee and your earnest money to the escrow agent named in the contract within 3 days after the Effective Date. They can be one payment or two.
• If that third day is a Saturday, Sunday or legal holiday, you get until the end of the next day that isn’t.
• Money the escrow agent receives goes to the option fee first, then earnest money.
• The escrow agent can release the option fee to the seller at any time.
• If you close, the option fee is credited to the sales price.

What happens if I don’t pay the option fee on time?

You lose the option. Paragraph 5D says that if no option fee amount is written in, or you don’t deliver it on time, you don’t get the unrestricted right to terminate.

That’s a costly mistake to make over a late check or wire. Get the fee and earnest money to the title company right away.

What happens to my money if I terminate?

If you send notice of termination in time:

• The seller keeps the option fee.
• Your earnest money is refunded.

That’s the trade. You pay a small, non-refundable fee to protect a bigger, refundable deposit.

What’s the deadline?

Notice has to be given by 5:00 p.m., local time where the property is, on the last day. The contract says time is of the essence, which means strict. At 5:01 p.m. on the last day, the option is gone.

Count the days with your agent. Write down the date and the time.

What should I get done during the option period?

This is your window to find out what you’re buying. Here’s my list:

1. Inspections. The contract lets you have the home inspected by inspectors you pick who are licensed by TREC or otherwise allowed by law. Get it scheduled the day you’re under contract. Add specialty inspections if the general inspector flags something.
2. Repair bids. If something big shows up, get a real number from a contractor before the deadline.
3. Insurance quote. Call your insurance agent early. Insurability is one of the things the lender looks at.
4. Survey questions. Ask whether the seller has an existing survey and whether anything was built since. See the T-47 article.
5. Seller’s disclosure. Read it, if you haven’t. The contract has a paragraph on whether you’ve received it.
6. Your loan. Send me your documents. The financing addendum says you have to apply promptly and work to get approved.

What about buying “as is”?

The resale contract has a box where you accept the property “as is.” That doesn’t take away your option. The contract says accepting the property as is doesn’t stop you from inspecting, from negotiating repairs in a later amendment, or from terminating during the option period.

So you can buy “as is” and still walk away in the option period if the inspection scares you.

How is the option period different from the financing addendum?

They protect different things.

• The option period is short and unrestricted. Any reason works. It costs you the option fee.
• The Third Party Financing Addendum protects your earnest money if the lender can’t approve you or the property doesn’t meet the lender’s requirements. It needs a written statement from the lender.

The option period isn’t a financing contingency. If your loan has a problem after the option period ends, the financing addendum is what protects you, as long as you’re inside its deadlines.

Does the option period matter for my loan?

It can. Some buyers wait until the option period is over to pay for the appraisal, so they don’t pay for one on a house they walk away from. Others want the appraisal early. There’s a tradeoff on timing, and I’ll talk it through with you when we’re under contract.

If you’re using down payment assistance or an FHA loan, tell me early about anything the inspection finds. I’d rather sort out whether it affects the loan before your option is gone, not after.

Before you sign

• Ask your agent how many option days to ask for and what fee makes sense.
• Know who the escrow agent is and how to pay them.
• Calendar the option fee due date and the option deadline.
• Line up your inspector before you’re under contract.

Your agent writes the contract. For contract questions, check with your agent or a real estate attorney. For your loan timeline, call me at 817-873-6288.