What is an option period?

keys in front door of house

During the homebuying process in Texas, you may hear the term “option period.” Discover the real estate definition of an option period in this guide. 

By Celita Summa

The concept of an option period tends to fly under the radar until it becomes relevant to prospective homebuyers. Then, first-time buyers are flooded with questions: What does “option period” mean? How does it relate to earnest money? How long is the option period? 

If you’ve never heard of option periods, there’s no need to panic. Here, we’ll explore the most common questions about option periods, so you can enter yours with confidence.

Note that Texas is the state where option periods are a typical step of the homebuying process. If you’re buying somewhere else, there may or may not be a similar step in your process.

Option periods in a nutshell

  • The primary goal of the option period is to give the buyer time to inspect the home and feel confidently committed to buying the property. During this period, the buyer is allowed to back out of the contract for any reason at all, no explanation required.
  • The length of an option period and the non-refundable option fee paid by the buyer are submitted along with the offer to buy the home. An agent can help you decide on the best strategy for your circumstances.
  • In a seller’s market, the most competitive option periods last three to five days and have an option fee of a few hundred dollars. The shorter the option period and the higher the fee, the more competitive your offer will be.

What is the option period in real estate?

The obligatory option period, also known as the inspection period, takes effect after both buyer and seller have signed a real estate contract.

The length of the option period length and the fee associated with it vary depending on the offer made by the buyer, and are included as part of the offer to the seller. The option period is designed to allow the buyer a specified number of days to ensure that there are no issues with the house and that they feel comfortable moving forward. 

What is the option fee vs. earnest money deposit?

When buying a home in Texas, you’ll be required to deliver both earnest money and option money, and many homebuyers confuse the two. Let’s take a look at what’s included in each fee.

  • Earnest money: Essentially a security deposit provided by the buyer to indicate serious interest in buying the home, earnest money is typically 1-5% of the home’s purchase price. The earnest money check is delivered to the title company and held in escrow. If the buyer cancels the contract during the option period, they’ll be refunded their earnest money, and if the purchase proceeds, the earnest money will be transferred to the seller’s account. 
  • Option fee: Option money is a smaller, additional fee paid by the buyer to the seller. It’s intended to offset the inconvenience a seller goes through during the option period. As a homebuyer, you’re essentially purchasing the right to enter the property and perform any necessary inspections before finalizing your purchase.

What do you do during the option period?

During the option period, a home inspection takes place and the buyer contemplates their decision. The buyer can decide to back out for any reason during this period, related to the inspection or not. If the buyer decides to terminate the contract, they’ll be refunded their earnest money deposit in full. Homes are listed as “option pending” during this time. Most option periods go off without a hitch, and the property sale proceeds as planned.

How long is an option period? 

The length of the option period depends on what’s agreed upon between seller and buyer. A shorter period of time and higher fee appeal more to a seller, so buyers who are in competition for homes tend to offer as few days as possible. 

Although option periods can last up to a week or longer, three to five days is a reasonable option in a seller’s market. Generally, a few days gives a buyer enough time to have a home inspection conducted and resolve any doubts before moving forward with the contract. The option period will end at 5:00 p.m. local time after the designated number of days have passed.

What is an option period for new construction?

When you’re buying a new home in Texas, there’s no official option period. Generally, a buyer is considered locked into purchasing a new-construction home when construction begins and the earnest money becomes non-refundable. 

How much is the option fee?

Just like the length of the option period, the fee varies according to what the buyer is willing to offer the seller. It’s usually a few hundred dollars. While earnest money deposits usually amount to 1-5% of the sales price, option fees are only around 0.1% of the sales price. Dallas-based Flyhomes Agent Ethan Robinson says option money in a buyer’s market can be as low as $100. In a seller’s market, on the other hand, option fee payments can range from $300-$500 or higher. 

Is the option fee refundable?

The option fee is non-refundable, but the amount of option money on the table is ultimately up to you as the buyer. A skilled real estate agent can also help you negotiate a contract that will apply your option fee to the sales price if you decide to move forward with the home purchase. Buying a property is a big commitment, and most homebuyers agree that paying an option fee is worth it to secure peace of mind on their real estate purchase. After all, the last thing you want is to buy a house and later discover it has wood rot or plumbing problems.

How does a buyer pay the option fee?

In the past, the option fee check could be made out directly to the seller, but as of April 1, 2021, the Texas Real Estate Commission has adopted a revised set of contract forms. Under the new rules, buyers must “deliver the option fee to the title company, not to the seller.” The option fee must be paid within three days of the contract’s effective date, unless the third day falls on a weekend or legal holiday, in which case the deadline is extended until the end of the first full business day. Buyers also have the option of delivering the option money together with the earnest money or separately.

Can a buyer back out during the option period?

Yes. The option period is designed to allow buyers to back out if necessary. There are no penalties for backing out during the option period, apart from the loss of your option fee. If you do decide to back out of the sale for any reason at all, you can pull out and receive your earnest money deposit back in full.

How can a buyer extend the option period?

In some instances, buyers need to extend the option period. Perhaps the home inspector has ordered a specialized inspection and the option period is set to end before the inspection can take place, for example. In this case, a second financial deposit is required to amend the option period, extending it to allow for additional inspections and negotiations. The extension must be made by mutual agreement between the buyer and seller.

What happens when the option period ends?

As soon as the inspection period ends, the home purchase is binding. In other words, there is no way to terminate your contract after the option period without forfeiting your earnest money. Once the active option period is over, the sale will be listed as pending while closing processes are underway, and after that, it will be considered officially sold. Congratulations on becoming a new homeowner!

Texas option periods, summed up

Hearing real estate terminology like “option period” and “earnest money” can be overwhelming for first-time homebuyers. Taking the time to understand each step in front of you can help you tackle your home purchase with less stress. 

As a buyer, think of the option period as your chance to make sure you feel comfortable buying a particular home. 

Flyhomes Agent Ethan Robinson sums up this sentiment in his advice to homebuyers: “I always tell clients the option period is you buying the seller’s time to do your due diligence.” 

Use this time wisely to conduct a home inspection and, most importantly, gain confidence in your homebuying decision—it could be one of the most important commitments you ever make.

FAQ about option periods

How long is an option period? 

In a seller’s market, an option period typically lasts between 3-5 days, but may vary. The buyer offers a number of days to the seller, and the seller can accept or reject the offer. 

What do you do in an option period?

Option periods allow homebuyers the chance to have property inspections and appraisals conducted, wrap up financing loose ends, and finalize their homebuying decision.

Can a buyer back out during the option period?

Yes, a buyer can back out for any reason during the option period.

What happens when the option period ends?

Upon termination of the option period, the real estate contract goes into full effect and the homebuying process proceeds to closing.

About the author: By day, Celita Summa is a Florida-based freelance writer specializing in real estate, technology, and a plethora of other topics. By night, Celita can be found developing her talents, which include her black belt in karate, her fluent Italian, and her knack for vegan cooking.