You’re Right to Terminate: Make Sure You Understand the Importance of the Option Period

Whether you are a first time home buyer or a seasoned veteran, it is important to understand your rights and obligations under the Texas real estate contracts. One of the most impactful paragraphs in the purchase contracts is the termination option.

Termination Option

This important right that the buyer has is outlines in Paragraph 5 of the purchase contract. It doesn’t matter which purchase contract, it is located in Paragraph 5 of each of the promulgated contracts. So, what is the termination option? Simply put, it gives the buyer the right to terminate the contract for any reason whatsoever. Paragraph 5A details the length of the termination option along with cost. This termination option is usually referred to as the option period and the cost is the option fee. So when your agent starts talking about your option period know that the termination option is what is being referred to. 

Paragraph 5 has several important pieces to it. And it starts right at the top of the paragraph by stating that the buyer has 3 days to deliver the earnest and option fee to the escrow agent. The escrow agent is almost always the title company that is issuing the title policy. This 3 days begins the day after the contract is signed by both sides. So if everyone signs on a Monday, the fee is due on Thursday by the end of the day. There is also a provision that if the third day ends on a weekend or holiday, the deadline is automatically moved to the next business day. 

You might be asking yourself, what happens if I am late delivering the fee? I mean, we all get busy and what is an extra day, right? Well paragraph 5D States that if the option is not delivered in time then NO TERMINATION OPTION EXISTS. 

The Option Fee

So as I stated before, the buyer has to pay a fee for this option to terminate. This fee varies, but somewhere around $250 is pretty common these days. 10 years ago $100 was pretty standard, but in the crazy pandemic market, we often say option fees of $500, $1,000 or even higher. Some people even threw in their first born child!

So you are probably wondering what happens with this fee? Well, it immediately becomes the sellers money. A few years ago it was even paid directly to the seller instead of to the escrow agent. You can think of this as paying the seller to take the home off the market for you. That way if you do terminate, they at least walk away with something. But, the good news is that it protects your (much larger) earnest deposit. Earnest deposits are often around 1% of the homes price so this is usually several thousand or even tens of thousands in the case of multi-million dollar homes. Much better to lose $250 than to lose $5,000.

Contract & Earnest Money

Now, even though the money is delivered to the escrow agent, the seller has every right to request it from the escrow agent at any time. And it is important to note, that the option fee goes toward your downpayment. So even if you do pay a higher option fee, it doesn’t cost you any extra in the long run. 

The Option Period

The next part of paragraph 5 outlines the option period itself. Essentially it states that the buyer will be granted the option to terminate the contract at any time during the option period. Well duh, that is what we have been talking about. But it also states the length of time for the option period. This is a blank and the number of days has ranged depending on if it is a buyer or seller market. Again, 10 plus years ago this blank would often have 10 days in it. But I haven’t seen 10 days in a long long time. 7 days is pretty common now although 5 or even 3 aren’t unheard of in a multiple offer situation. Sellers don’t like buyers being able to change their mind for long periods of time, but buyers want to have an escape in case things don’t turn out like they want.

It is important to note that the option period is one deadline in the contract that differs from the others. Deadlines in the contract end at 11:59pm at night. However, a number of years ago, Texas changed the termination option to explicitly end at 5pm local time. I assume there were many complaints from agents having to stay up to midnight negotiating. 

So What’s the Point?

So after all this, do you need an option period? Well, the answer might surprise you, but ultimately it depends. There are a number of factors that go into an answering this question. As mentioned before, the termination option allows you to terminate for ANY REASON. However, the main purpose it is used for is the inspection and repair negotiations. See, in Texas, homes are sold As-Is. This means that the seller is not required to make any repairs. But what happens if you find out the roof is collapsing or maybe the AC doesn’t work. The termination option becomes your leverage to negotiate these repairs. You say that if the seller doesn’t make the repairs you will terminate and the seller will have to find a new buyer. On top of that, the seller will now have to disclose these new defects they have been made aware of. So it is in everyones best interest to negotiate a resolution. 

Home Inspection

But in addition to the inspection, I have seen buyers use it for financing or appraisal purposes. I recently had a buyer that was laid off a couple days after going under contract. We could have used the financing contingency to get him out and his earnest money refunded to him. But that would have required a loan denial from the lender. In the end it was just easier to use the termination option. 

Now back to our questions or whether or not you need an option period. In some cases it might make sense to forgo one. The reasons can vary but in multiple offer situations you might decide to skip it in order to make your offer more appealing. The reality is that there are over 40 ways to get out of the Texas real estate contract. We have a previous article on this and you can read it here. Now, not all 40 outs are going to apply too your contract. If you are a cash buyer then the financing contingencies don’t apply, if there is not an HOA then the HOA contingency doesn’t apply, etc. But, if you find yourself in a situation where you might forgo it, then speak to your real estate agent and see what options you might have in lieu of your option period. Every situation is unique and a skilled agent will be able to counsel you on the pro’s and con’s of skipping the option period. So make sure you are working with a skilled agent such as the agents here at BlackJack Realty. If you have any questions feel free to reach out. You can find us online at www.blackjackrealty.net or call 469-914-7707 or email [email protected]

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