What Is an Option Period in Real Estate?

The “option period” in real estate is a negotiated timeframe within a property purchase contract. It provides a buyer with the opportunity to thoroughly evaluate a property before fully committing to the transaction. This period is a safeguard, allowing buyers to gather information and assess the home’s condition without risking their earnest money deposit if they decide not to proceed.

Understanding the Option Period

The option period grants the buyer an unrestricted right to terminate the real estate contract for any reason. This limited timeframe allows the buyer to conduct thorough due diligence and exit the contract without forfeiting their earnest money.

To secure this right, the buyer pays a non-refundable “option fee” directly to the seller. This fee compensates the seller for taking the property off the market during this period. Option fees typically range from $100 to $500, though the amount can vary based on negotiations and market conditions. If the transaction proceeds to closing, this option fee is usually credited back to the buyer toward the purchase price.

The duration of the option period is negotiable between the buyer and seller and is specified in the contract. A typical option period often lasts between 7 and 10 days. Calendar days are counted, including weekends and holidays, starting the day after the contract’s effective date, with the period typically ending at 5 p.m. local time on the final day.

Buyer Due Diligence During the Option Period

During the option period, buyers undertake various activities to gather information and assess the property’s condition. A common step involves hiring professional home inspectors to evaluate the property’s structure, electrical systems, plumbing, and heating, ventilation, and air conditioning (HVAC) systems.

Buyers may also arrange for specialized inspections, such as those for pests, mold, the roof, or the foundation, especially if the general home inspection suggests potential concerns. The cost for these inspections is typically borne by the buyer, with a general home inspection often costing between $350 and $600 depending on the property’s size. This thorough examination helps buyers understand any necessary repairs or potential long-term maintenance costs.

Another crucial step is working with a lender to finalize loan underwriting and approval, which may involve providing additional financial documentation. An appraisal, typically ordered by the lender, assesses the property’s fair market value. While appraisals are generally not completed within the short option period, buyers may also review seller disclosures, homeowner association (HOA) documents, and other pertinent property information. Based on their findings, buyers may attempt to negotiate repairs or a price reduction with the seller.

Concluding the Option Period

As the option period nears its end, the buyer must decide whether to proceed with the purchase or terminate the contract. This decision is informed by all due diligence conducted, including inspection findings, appraisal results, and financial considerations.

If the buyer chooses to proceed, they typically allow the option period to expire. The contract then moves forward towards the closing process, and the non-refundable option fee is typically credited toward the purchase price.

Should the buyer decide to terminate the contract, formal written notice must be provided to the seller or their agent within the option period. Upon proper termination, the buyer will forfeit the non-refundable option fee. However, the earnest money deposit, which is a larger sum held in escrow, is typically refunded to the buyer. If a buyer takes no action to terminate and the option period expires, the contract remains active, and the earnest money may become non-refundable if the buyer later defaults on the agreement without a valid contractual reason.