What is an Option Period in Real Estate?

When buyers are making an offer on a house, there are often many questions about earnest money and option money, money that is paid in the first few days of an executed contract. Option money, in particular, can be confusing so let’s talk about an option period in real estate and what that entails. {If you’d rather watch than read, scroll down to the bottom for the video version.}

what is option money and an option period in real estate

What is an Option Period?

Let’s talk about a Texas real estate option period. In Texas, when an offer is made on a house, the buyer can decide whether or not they want to include an option period. This is a short time period, purchased by the buyer, that allows the buyer to do their due diligence on this home. During this time, an inspection can be ordered and repairs can be negotiated with the seller.

Depending on the house and its age and condition, in addition to a regular inspection, other inspections may be ordered: pool, foundation, septic tank, or more. All inspections are ordered and paid for by the buyer unless otherwise negotiated in the initial contract.

Why Is an Option Period Important?

As stated above, the option period is the time to find out exactly what you’re buying. If an inspection reveals problems that you are unwilling or financially unable to deal with, or adequate repair negotiations can’t be reached with the seller, you can walk away from the contract. You will lose the option money but earnest money will be refunded.

Should You Opt for an Option Period?

There are very few cases where I would recommend eliminating an option period. Buyers should know exactly what they’re buying and the only way to ensure that is to have a professional inspection done.

I have had a client waive an inspection on an investment property when it was very evident the house had foundation issues and would need improved plumbing and wiring. They were certain the inspection wouldn’t reveal more than they already knew and they used the lack of option period as a negotiating strategy to drop the price of the property.

However, even in a situation where you know an inspection will reveal issues, it can still be extremely valuable to have inspections so you can learn the full extent of what’s there. On one property I sold, the buyers waived a standard inspection but paid extra money for an extensive asbestos inspection. Finding large amounts of asbestos may have made their renovation plans far too costly.

And, one thing to note: even when the option period is waived, a buyer can still obtain an inspection to get information about the property. The buyer just doesn’t have the unrestricted right to terminate the contract like you would with that period of due diligence.

How Much Option Money is Needed?

Option money in Texas is typically only a couple hundred dollars {unlike earnest money that is typically 1% of the offer price} but this is an area where an agent can negotiate to make the offer more appealing. Increasing the option money amount can tell a seller that a buyer is very serious. If they walk away from the deal during the option period, they have more to lose. On the flip side, a buyer needs to think carefully about increasing those funds because of the potential to lose it.

Option money is never returned. If the contract continues, the option money is applied to the final costs for the buyer but if the contract is terminated, the money is given to the seller.

How Long is the Option Period in Texas?

In Texas, a standard option period on a residential property is about five to seven days, however, this is an area that can be negotiated as well. In a seller’s market, a shorter period is much more attractive and three or five days is common to see. On the flip side, ten days may be requested if the option period falls over a holiday, is affected by other factors like weather, is being purchased during a buyer’s market, or the property has extenuating circumstances.

Regardless of how many days are chosen for an option period, be sure you have enough time to get an inspector out to the house and to negotiate any repairs within that time frame.

What Happens at the End of the Option Period?

When the option period expires, the contract continues into the next phase, preparing for closing. It’s too soon to celebrate completely {wink} but you’re definitely over a big hurdle.