Earnest money and option money in real estate transactions

Earnest Money vs. Option Money

In Real Estate, Residential Real Estate by Wade FunkLeave a Comment

Buying a house in Austin, TX is as simple as pulling up “funk.com” on your smartphone and clicking “buy now”…next day you pick up the keys and you’re done.  It’s like Amazon Prime for houses!  NOT!

In reality, there are tons of moving parts in the home buying (and selling) process and even more terms to remember.  It’s not rocket science, but it is, or can be, confusing.  Luckily, I have stayed at a Holiday Inn Express, so I can help clear this stuff up!  One of the more confusing or easily swapped terms is the “Option Fee” and “Earnest Money”.  They are separate and definitely not equal.

When you make an offer on a residential property in Texas, you’ll consider two up front payments to show how serious you are in committing to the property.  The first of those is the “Option Fee“, aka “Option Money“, which is money paid directly to the seller of the property.  This non-refundable fee is negotiable (aren’t they all) and is related to the amount of time you are “buying”.  For example, if you want a 5-7 day option period, you may offer $200 on a $250,000 house.  If you want a 10-14 day option period, you may offer $250-$300 for the same house.  Several factors can sway your decision…how long the home has been on the market, multiple offers, price, etc.  You’re basically buying, or paying for, you’re unrestricted right to back out, for ANY reason, during your option period.  During your option period, you have the right to inspect the property, reconsider your options, etc.  If you decide, for whatever reason, that you do not want the property, you can terminate and get your earnest money (see the next paragraph for details on that bad boy) back, no questions asked.  Well, I mean, they will ask why, but they can’t prevent you from backing out.  The option money is non-refundable and is likely (negotiable) to be applied to the purchase price.*

The other amount to consider is the “Earnest Money“.  This fee is paid to the title/escrow company and is held as a deposit that is credited toward the purchase price of the home.  This amount is also negotiable, and again, is dependent on the circumstances of your offer.  Generally speaking, the earnest money is roughly 1% of the purchase price of the home.  For example, earnest money for a $250,000 home would be roughly $2,500.  This amount can be refunded in the event you back out during your option period, or your financing isn’t approved, or you must terminate the contract for other reasons you, as the buyer, can’t control.  Could be any number of reasons, but your Broker or Realtor® can help guide you through the process and clear up any questions.  Generally speaking, you want to assume your earnest money will be lost once your option period expires, so treat the contract and timing as such to preserve that money if need be!  Don’t take anything for granted during the home buying process.

Notes:  *Even if the option fee is paid by the buyer, but the seller’s agent doesn’t “receipt” the option fee in time (generally 3 business days after contract execution), or the option fee isn’t paid, the option period disappears, and so too, does the buyer’s unrestricted right to terminate the contract, so pay special attention to the timing of delivery and “receipts” of those monies.   Option periods can also be extended, but those extensions will also require a non-refundable consideration fee…nothing is free!

 

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