In the financial securities market, "options" are trading instruments derived from the price of the underlying security such as stocks, bonds, other currencies. It gives investors the right, but not obligation to buy or sell a particular asset at a pre-set price by a specific date.
In the Texas real estate market, "option period" refers to the buyers right to terminate the previously signed TREC 1-4 contract. On page 8 of the contract, item 23 - Termination Option allow buyers to select X number of days in exchange for X amount of dollars (with the seller) for the right to later terminate the contract. Some people call this the inspection clause because it is typically when the buyer hires an inspector to review the home for deficiencies and other defects. This allows the buyer to terminate the contract for any reason OR no reason at all. Typical option periods are 5-7 days and $100 to $500, all depending on the unique property and local markets. Essentially, it provides an additional window of time for buyer to complete additional due diligence such as contractor bids, confirming school zones, water testing, roof evaluation etc. Option period ends at 5pm local time. In the case that a buyer elects an option period and wishes to terminate the contract, buyer must complete TREC form "Notice of Buyers Termination of Contract". If this form is delivered to the sellers agent prior to 5pm, the seller retains the option fee and the buyer is returned the earnest money.
If paragraph 23 of the TREC 1-4 Contract is not completed, there is no option period. If the option fee is not paid within 3 calendar days after date of execution (all signing complete), there is also no option period.
TREC No. 20-14 paragraph 23 Termination Option reads:
For nominal consideration, the receipt of w hich is hereby acknowledged by Seller, and Buyer's agreement to pay Seller $ (Option Fee) within 3 days after the Effective Date of this contract, Seller grants Buyer the unrestricted right to terminate this contract by giving notice of termination to Seller within days after the Effective Date of this contract (Option Period). Notices under this paragraph must be given by 5:00 p.m. (local time where the Property is located) by the date specified. If no dollar amount is stated as the Option Fee or if Buyer fails to pay the Option Fee to Seller within the time prescribed, this paragraph will not be a part of this contract and Buyer shall not have the unrestricted right to terminate this contract. If Buyer gives notice of termination within the time prescribed, the Option Fee will not be refunded; however, any earnest money will be refunded to Buyer. The Option Fee will will not be credited to the Sales Price at closing. Time is of the essence for this paragraph and strict compliance with the time for performance is required.
- Make sure you sign a contract permitting yourself an option period.
- Ensure seller receives the option fee as soon as possible but no later than three days after date of execution.
- Complete all necessary due diligence during this period to ensure the property meets your objectives.