Option periods: What to know when buying real estate in Texas

The option period is a small but consequential part of a real estate transaction when you’re selling or buying a home in Texas. This provision allows buyers to terminate a contract within a designated time frame without losing their good faith deposit. It’s often called a due diligence period in other parts of the country.

Option periods are not required by law and can be negotiated, making it essential for buyers and sellers to familiarize themselves with fees, pros and cons, and other considerations of this provision.

What is an option period?

An option period is a phase in a real estate contract that allows potential homebuyers to walk away from the sale without penalty. It typically lasts seven to 10 days but can be as little as a few days.

During this time, buyers can fully evaluate the property, request repairs from the seller, renegotiate the sales price, or back out of the sale entirely. In turn, sellers can’t sell the property to anyone else during the option period, though they can accept backup offers.

While commonly referred to as an option period in Texas, it’s more often known as the due diligence period in other states, emphasizing the buyer’s chance to thoroughly assess the property before finalizing the transaction.

How much is the option fee? 

The option fee is typically a nominal amount, ranging from $100 to $500. The exact amount is negotiable and ultimately decided by both parties during the contract negotiation. It is paid directly to the seller for the right to an option period.

The option fee is non-refundable and compensates the seller for giving the buyer the chance to back out of the sale without losing their earnest money deposit.

Option fees vs. earnest money deposits

The option fee shouldn’t be confused with the earnest money deposit, a much larger “good faith” deposit that’s held in escrow and then applied to closing costs. Earnest money deposits are typically 1% to 3% of the purchase price and aren’t refundable if the buyer backs out of the homesale outside of an option or due diligence period.

This is why option periods are so important: They provide buyers with the opportunity to conduct a thorough evaluation of the property without the risk of losing their earnest money deposit.

When does the option period start and how long does it last?

Option periods are typically seven to 10 days, but it is ultimately decided by the buyer and seller. In some cases, both parties may agree to extend the option period after it has come to an end.

Most people use the option period to better understand the condition of the property they’re buying. The buyer can schedule home inspections to ensure there are no unexpected problems with the house, particularly with its foundation, roof, plumbing, HVAC, and electrical system.

Once the buyer receives the inspection results, they can also get estimates for any repairs that the inspector suggests. The buyer can use this information to renegotiate the sales price so that it includes the cost of repairs, request that the seller fixes the damage themselves before the sale closes, request a seller credit, or concession towards the closing costs.

How do option periods benefit the buyers?

Option periods benefit buyers by giving them a timeframe to withdraw from a homesale without penalty. This cushion gives buyers the ability to conduct a thorough assessment of the property, allowing them to make an informed decision without the pressure of losing their earnest money deposit.

Let’s consider an example. Imagine you put in an offer on a $450,000 home, including a standard 3% earnest money deposit of $13,500. During the closing process, you find mold in the home, jeopardizing your mortgage, peace of mind, and even your health.

• Without an option period: To walk away, you’d lose your $13,500 earnest money deposit, significantly diminishing your buying power.
• With an option period: You opted to negotiate an option period and paid a $500 option fee directly to the seller. While you won’t recoup the $500, you have the freedom to renegotiate the sale price or walk away without losing your $13,500 deposit.

While every buyer may want an option period, it isn’t mandatory and can be negotiated within a purchase agreement. Sellers may prefer shorter periods or choose not to offer an option period at all, especially in competitive seller’s markets where multiple offers are common.

Do you need an appraisal before the option period?

An appraisal is not required before the option period in a real estate transaction, although they may happen simultaneously. Appraisals and option periods have different aims:

• Option periods focus on a buyer’s due diligence – ensuring the home is up to their standard.
• Appraisals focus on a lender’s due diligence – ensuring the home value is adequate collateral for the buyer’s requested mortgage.

If a buyer is concerned there may be issues with the appraisal, they can opt for an appraisal contingency. This is a separate contingency from an option period, which allows a buyer to back out of a home sale if the property's appraised value is less than the agreed-upon purchase price.

What should buyers do during the option period?

During the option period, buyers should do their due diligence to ensure the home is in proper condition. They can do so by taking the following steps:

• Conduct inspections: Hire a qualified home inspector to evaluate the property's condition, including structural integrity, electrical systems, plumbing, and any potential issues. This assessment can help identify any problems that may require repairs or affect the property's value, and can be used as grounds for any renegotiations.
• Review disclosures and documents: Examine any disclosures provided by the seller, such as previous repairs, pest inspections, or title reports. Buyers should also review neighborhood information, zoning regulations, and any homeowner association (HOA) rules if applicable. Consider hiring a real estate attorney to help review these documents.
• Negotiate repairs or adjustments: Based on the findings from inspections and document reviews, buyers can negotiate with the seller for necessary repairs or adjustments to the purchase price. This negotiation may involve requesting credits or contingencies that protect the buyer's interests before finalizing the transaction.

Frequently Asked Questions (FAQs)

Answers to the most frequently asked questions about option periods in real estate:

What states have option periods?

Option periods are unique to Texas. Other states, like North Carolina, California, and Georgia, have similar due diligence periods that allow buyers to assess properties before finalizing a purchase.

Is the option period the same as an earnest money deposit?

No, the option period and earnest money deposit are separate parts of the homebuying process. The option period grants buyers a window to assess the property, while the earnest money deposit shows the buyer's commitment and takes the house off the market.

How do you calculate the option period in Texas?

In Texas, the option period begins the day after the seller accepts the contract and typically lasts for a negotiated duration, often seven to 14 days. To calculate, count the days starting from the acceptance date, excluding weekends and holidays if specified.

Is the option period required in Texas?

No, the option period is not required in Texas. It’s a negotiable term in the purchase agreement. Buyers can choose to include it for added protection, but sellers may also decide not to offer it, depending on the specific transaction.