Option Period: What it is and how it affects buying and selling texas homes
What is an option period?
An option period is a short window of time after your offer is accepted during which you take a closer look at your new home. If you find red flags or major issues during the option period, you can terminate the purchase and get your earnest money deposit (EMD) back from the seller. In fact, during the option period you can terminate the contract for any reason.
If you’re not from Texas, you may have never heard of an option period. That’s because option periods are called different things in different places. Across the United States, due diligence is probably the most common name for an option period, but you may also hear it referred to as the inspection period or contingency period. Whichever name is used, know that it’s referring to the same thing: a finite period of time designed to give you peace of mind as a homebuyer.
You (the buyer) and the seller agree on the length of the option period as one of the terms in your contract. For example, some complex properties with lots of systems (septic, a well, a pool, etc.) require longer option periods. While this period can last anywhere from a few days to a few weeks, Redfin reports that a typical option period is between one and two weeks long.
Sellers expect to see an option period in a residential real estate contract, but — generally speaking— the longer the option period is, the less competitive your offers is. To get the privilege of having an option period as a homebuyer, you’ll pay an option fee to the seller. (Option fees typically range from $100-$500. By paying this fee, you’re purchasing the right to back out of the purchase for any reason during the option period. If for some reason you need to extend the option period, you’ll pay an additional fee. You may dread the idea of an additional fee, but it’s worth it. Here’s why:
- Without an option period: If you end up terminating your purchase for a legitimate reason—like serious structural problems and a bad septic system the seller refuses to fix —you’ll forfeit your EMD, which is typically 1-3% of the purchase price of the home. On a $350,000 home, that means you could lose anywhere from $3,500 - $10,500.
- With an option period: say you pay a $500 option fee for a seven-day option period. If you decide you want to walk away on day six, you can do so without issue. You’ll lose the $500 option fee, but you’ll recoup your significantly larger EMD.
What happens during the option period?
Option periods are baked into residential real estate contracts in Texas for a number of reasons. The three most common things that happen during this period include:
A home inspection is a thorough examination of a home by a licensed home inspector. After the inspection, your home inspector will issue a detailed report on the condition of your new home. They’ll help you understand any concerns or necessary repairs so you can address them with the seller before finalizing your purchase contract.
Buying a home is a huge investment and your home inspector is an invaluable member of your team. As an experienced professional, they’ll use their knowledge to help you avoid any major missteps.
Home appraisals are typically ordered by your mortgage lender. During the appraisal process, an appraiser—an independent and unbiased professional—will assess the fair market value of your potential home. Your lender will use the results of the appraisal to determine how much money they’re willing to lend you for the property.
Today there is an appraiser shortage so most homebuyers aren’t able to get an appraisal during the option period. When you use our Buy with cash or Buy Before you sell solutions, you’ll benefit from our Dual Appraisal Advantage. It works the same way with either program:
- You place a cash offer on your new home (using Homeward’s cash).
- Once the offer is accepted, Homeward conducts a Preliminary Appraisal during the option period. This takes up to five days (so your option period can be as short as five days, making your offer more attractive to the seller).
- Homeward buys the home and you move in.
- You buy back the home from Homeward once your new mortgage is ready. During this period, your lender conducts a Final Appraisal. If the Final Appraisal comes in lower than our Preliminary Appraisal, you can adjust your loan as necessary or terminate the contract and keep your EMD.
Traditionally, homebuyers have had to choose between moving quickly and having peace of mind. But when you make a Homeward Cash Offer, you can have both. You’re able to make a more competitive offer with confidence.
How should buyers think about option periods?
“The chief benefit of the option period is it allows the homebuyer time to determine if they want to move forward with the purchase. If not, they'll face little to no penalty,” says Katie Collins, Customer Experience Manager at Homeward. “In a hectic, fast-paced, and emotionally overwhelming market, this time gives the buyer space to breathe and evaluate both the condition of the home and the costs of moving forward.” In a perfect world, the information you gather in the option period makes you more confident about moving forward.
That said, it’s important to recognize that while paying the option fee and including an option period provides more reassurance, asking for too much time may make your offer less competitive.
In general, the shorter your option period, the more attractive your offer is to the seller. You’ll want to strike a balance by making sure you have enough time to get the information you need, while also finalizing the deal as soon as possible to give the seller the certainty they crave. There are several things you can do to help achieve this:
- Always get mortgage preapproval ahead of time. While preapproval may not equal final mortgage approval, it dramatically speeds up the process and allows you to move much faster. If you’re making a Homeward Cash Offer, get approved before you start house hunting. That way, you’re ready to make a cash offer as soon as the home you love hits the market.
- Choose an inspector. Research and choose a home inspection company before you even make an offer. Reach out to them to check their availability and see how much notice they require to perform an inspection. You can also check with the seller’s agent to confirm the utilities are on so you avoid delays.
- Use our Buy with cash or Buy before you sell solution. "In today’s market, any contingency can make your offer less attractive to sellers,” explains Brian Gubernick, Homeward’s Chief Real Estate Officer. Many real estate markets are highly competitive right now, but even in a cooler market using a cash offer can set you apart and help you save a lot of money. Your Homeward Cash Offer includes an option period, so you’ll have the time you need to do your due diligence before finalizing the deal.
How do sellers feel about option periods?
We’ve hinted at it above, but let’s be clear: Sellers often have a very different view of option periods than buyers do. For a seller, the goal is usually to lock in the best offer on their property as soon as possible. Option periods delay sellers from achieving that goal, so a seller is typically motivated to shorten the length of the option period (or eliminate it altogether).
“While including an option period is a common practice in Texas real estate, it’s not a mandatory requirement,” explains Collins. Sellers are free to reject offers that include option periods or to make counter offers without option periods. The inclusion of the option fee often makes the idea of an option period more palatable to a seller — they’ll lose a few days if you walk away, but they’ll keep your option fee—but it’s still a small amount of money compared to actually selling the property.
Bring your best offer to the table
As a buyer, you need to make sure you make the most competitive offer you can, while still ensuring you’re making a great investment.
If you're a homebuyer interested in learning more about becoming a cash buyer, schedule an appointment with a Homeward Advisor here.
If you're an agent interested in turning contingent clients into cash buyers, schedule an appointment with a Homeward Advisor here.