Grant Trevithick Real Estate Investor Pro Tip - What is the difference between Option Fees and Earnest Money

Grant Trevithick Carrollton Real Estate Investor here with another pro tip. In the state of Texas and many counties including Irving, Addison, Carrollton, Dallas, Fort Worth, and Grapevine rules for Earnest Money and Option Fees varies. Today we are going to go over some of the basics so that you can understand what the differences are between them.

In the state of Texas, Buyers often provide two checks once under contract on a property. Let’s dig into the expenses and their differences.

OPTION FEE

• Negotiable, but often $100-$500.
• Payble to the Sellers. Seller may cash or deposit immediately.
• Upon closing on the home, option money is applied as a credit to the Buyer.
• Non-refundable.
• Purpose: Payment to the Seller for the right to perform due diligence, often by means of an inspection, within a specified amount of time (i.e. the option/termination period). This fee gives the Buyer the unrestricted right to cancel the contract during their option period (for any reason).

EARNEST MONEY

• Negotiable, but often 1% of the purchase price.
• Payable to the Title Company and deposited into an Escrow Account.
• Upon closing on the home, earnest money is put toward the Buyer’s down payment, closing costs and prepaids.
• Potentially refundable. If Buyer terminates the contract during the option/termination period or if they’re unable to secure financing, the Earnest Money is refundable in full. Earnest Money is also refundable if Seller’s don’t deliver important documents within a timely manner or default on the contract.
• Purpose: Acts as a security deposit. Basically, the Buyer is demonstrating their serious interest and intent to complete the transaction and purchase the property.

When are the payments due?

• Within 3 days of an executed contract, by 11:59 p.m.. This includes weekends and holidays. Payment must be made in a timely manner or the Buyer can be held liable.

Do I have to pay an earnest money deposit to have a valid contract?

• There is no law that requires an earnest money deposit. Sellers, however, typically require it as a safeguard in the sell of their home.

What happens if I don’t pay or my earnest money check bounces?

• If you agree to pay earnest money but do not make the required payment or your check bounces, you will likely be considered in breach of the contract.

What if a standard contract form is not used?

• Plenty of builders and developers have crafted their own agreements to use in real estate transactions. Most often these will include earnest money and option money deposits. It’s important to review all contracts as some may not allow for earnest money refunds under any circumstances.

Do I get my money back if the transaction does not close?

• Option Money - No. Earnest Money - Potentially. It depends on why the transaction did not close. For example:
• If the Seller fails to submit documents in the time specified in the contract - Yes
• If the Seller fails to make repairs or provide good title - Yes.
• If the Buyer performs an inspection and requests to cancel within the option period - Yes.
• If the Buyer performs an inspection and requests to cancel after the expiration of his/her option period - Unlikely, but up to the Seller.
• If the Buyer has a financing contingency in place and is not able to qualify for a loan - Yes, but must cancel before the financing contingency ends.

Can I rescind my approved home loan and get my earnest money back?

• No. A Buyer is only able to receive earnest money back if they are unable to qualify for a loan. Sure, Federal law gives you three days to cancel a home loan commitment, but it does not give you the right to cancel a purchase contract and get a refund of your earnest money. Your obligation to the contract is unrelated to your right to obtain the best possible loan or avoid a loan that has hidden conditions and fees. This is why we highly recommend shopping around lenders and thoroughly investing loan packages. Even if the sales contract has a financing contingency clause, your cancellation of an approved loan is not one of the conditions that would release you from the sales contract.

An option fee gives me an option/termination period to perform due diligence. How long is my option/termination period?

• This is completely negotiable. Agents typically see 7-10 days, but it’s not unheard of for contracts to include longer option periods. It’s vital to schedule inspections as quickly as possible to ensure you’ve received your report(s) before the period ends. This allows the Buyer to exercise their right to terminate if they are unsatisfied with the condition of the property. And remember - the Buyer has the right to re-inspect the property at reasonable times. A Seller who refuses to permit additional inspections or grant entry at reasonable times would be in breach of contract.

What happens if the Seller and Buyer are still negotiating repairs on the last day of the option period?

• Should parties be in agreement, an extension can be executed as an amendment to the contract. This extension is subject to an additional option fee should the Seller require.

At what time does the option period end?

• At 5:00 p.m. on the date specified.

Can an option fee check be mailed to the Seller?

• Technically, yes. But remember, the check must be paid within 3 days (by 11:59 p.m) of an executed contract. Therefore, overnight delivery may be necessary.

What happens if a Seller starts to fix repairs found in the inspection prior to the end of an option period? Can the Buyer still back out?

• A Buyer does not automatically give up his/her right to terminate the contract under the option period when the Seller agrees to make repairs. However, if the Buyer checked Paragraph 7 of the amendment, he/she would have waived his right to terminate the contract once the repair amendment was effective. It would be advisable for a Seller to wait to complete any repairs until after the Buyer’s right to terminate has expired or has been waived.

Can the option fee check be delivered to the title company along with the earnest money check?

• Doing so could put your client at risk of not securing an option period. Option checks must be payable to the Seller within 3 days of an executed contract. This means it must be in the Sellers or Seller’s agents hands by then. Delivering the fee to the title company does not satisfy contract requirements, nor should one rely on the title company to get option checks to the Seller.

Who signs receipt of the earnest money check?

• Title Company

Who signs receipt of the option fee check?

• The Seller or Listing Agent/Broker.

Grant Trevithick is a Real Estate Investor who conducts business in the state of texas. Including Carrollton, Dallas, Irving, Addison, and Fort Worth. He is sharing basic information with the intention to educate. Please consult advisors when making any large financial decisions.