Texas and, less commonly, other states, allow a sale option period during which a buyer may cancel a sale for any reason without risking his earnest deposit. This type of option period is similar to the more typical contingency periods that allow buyers to elect certain conditions under which they can cancel, including unsatisfactory inspection results. The other type of option period common in real estate is the lease-option period, which gives a tenant time to decide whether she wants to purchase the home at the end of the lease.
How the Sale Option Works
In a sale option, when the buyer prepares the sales contract, she elects a clause creating an option period that lasts a specific period of time. A week or so is common. If, during that specified period, she decides to back out of the sale, she may do so without consequence. She receives back any deposits she’s made and is under no further obligation.
Sale Option Fee
The buyer pays the seller an option fee for the privilege of electing the option period. The fee is negotiable and non-refundable, even if the buyer chooses to proceed with the sale. Unlike earnest money deposits, which are held in a special escrow account and applied to the buyer’s down payment, the option fee goes directly to the seller. The seller may use it as he sees fit, whether or not the sale proceeds. He does not apply the fee to the down payment.
How the Lease-Purchase Option Works
In a lease-purchase option, the buyer begins as a tenant with a lease that usually lasts one to three years. The lease includes an option that gives her the right to purchase the home at the end of the lease term, for whatever price the tenant and landlord have negotiated. The option period ends on a date the lease specifies. The tenant must decide whether or not she’s going to purchase the home by that date. If she chooses to buy the home, the landlord must agree to sell it to her for the agreed-upon price.
Lease Option Fee
The tenant pays the landlord an option fee for the privilege of having the option to purchase the home. The tenant and landlord negotiate the amount. Although the landlord typically doesn’t apply the option fee to the tenant’s down payment if she decides to purchase, the option fee may apply toward the down payment if the landlord and tenant agree. The landlord keeps the fee if the tenant chooses not to purchase or is unable to purchase the home.