EARNEST MONEY VS. OPTION FEE: WHAT YOU NEED TO KNOW

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.

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.

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.

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

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.

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.

Option Money - NO. Earnest Money - Potentially, it depends on why the transaction did not close.

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.

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.

Negotiable, but often $100-500.
Payable 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).

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.

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

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.

The buyer must deliver the option fee to the Title Company within three (3) days after the effective date of the contract. Note, however, that if the last day to deliver the option fee falls on a Saturday, Sunday, or legal holiday, the time to deliver is extended until the end of the next day that is not a Saturday, Sunday, or legal holiday.

YES. The option fee and earnest money may be paid separately or combined in a single payment. The amount delivered will be applied first to the option fee then to the earnest money. Any amount of funds remaining after that will be applied to any additional earnest money.

NO. Under the revised forms, the buyer authorizes the escrow agent to release and deliver he option fee to the seller at any time without further notice to or consent from the buyer, and release escrow agent from liability for delivery of the option fee to the seller. The option fee will be credited to the sales price at closing. Note, however,, that any disbursement may be conditioned on the collection of good funds, acceptable to the escrow agent. Tutle companies, which are regulated by the Texas Department of Insurance, must comply with "good funds" rules before disbursing option fees.