What is an Option Period:
In a real estate transaction, an Option Period is a specified number of days (typically 7-10) during which the buyer can terminate the deal for any reason without risking the loss of their Earnest Money Deposit. This means the buyer will want to conduct all of their due diligence during this Option Period, including completing any inspections and/or repair estimates.
During the Option Period, the property will be marketed with the status "Option Pending" so that other potential buyers know the seller has accepted an offer already and the parties are currently in the Option Period.
Earnest Money Deposit vs. Option Fee:
An Earnest Money Deposit is money held in escrow by a title company and put down by the buyer once a property is under contract in order to show the buyer's good faith. Once the transaction is finalized, the Earnest Money Deposit is applied to the buyer's total Down Payment. An Option Fee, on the other hand, is non-refundable money that a buyer pays directly to the seller as compensation for taking the property off the market during the Option Period while the buyer conducts their due diligence.
For example, if a Buyer enters into a contract for a property at $300K with an Earnest Money Deposit of 1%, the Buyer would write a check for $3k to be held in escrow by the title company until closing as well as a separate check made out and delivered to the Seller for the Option Fee.
Effective Date vs. First Day of Option Period:
The buyer must deliver the Option Fee to the Seller (or the Seller's Agent) by 11:59 pm on the 3rd day after the Effective Date (i.e., the 3rd day of the Option Period). The first day of the Option Period begins the day after the Effective Date of the contract.
For example, let’s say a Purchase Contract (with an Option Period) was accepted by the Seller and signed by both parties on May 1. Unless otherwise specified, the Effective Date of the contract would be May 1, the Option Period would begin on May 2 and the Option Fee would be due by 11:59 pm on May 4.
Consequences of Canceling a Contract during the Option Period:
A buyer can terminate their Purchase Contract during an Option Period without losing out on their Earnest Money Deposit. However, the buyer will not be refunded their Option Fee, no matter the reason for termination.