In a back-up contract situation, when can the back-up buyer receive a refund of the option fee?

At the November quarterly meeting of the Commission, changes were adopted to several contract forms.

One of those changes involved how the option fee is handled and delivered in the contract. The following FAQs are intended to avoid confusion on this change.

For a review of other major changes to the forms, see the Commission’s article “Rule and Contract Updates from the November Commission Meeting.”

What changes are being made to the delivery of the option fee?

Under the revised contract forms, which become mandatory April 1, 2021, a buyer is required to deliver the option fee to the title company, not to the seller.

What is the deadline for delivery of the option fee to the title company under the revised forms?

The buyer must deliver the option fee to the title company within three 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.

May the buyer deliver the option fee together with the earnest money?

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.

Will the seller have to wait until closing to receive the option fee from the title company?

No. Under the revised forms, the buyer authorizes the escrow agent to release and deliver the option fee to the seller at any time without further notice to or consent from the buyer, and releases 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. Title companies, which are regulated by the Texas Department of insurance, must comply with “good funds” rules before disbursing option fees.

When will the updated versions of the forms be available for license holders to use?

Because corresponding changes need to be made to two additional forms – the Notice of Buyer’s Termination of Contract (TREC No. 38-6) and the Short Sale Addendum (TREC No. 45-1)—the updated contract forms will not be available for use until after the February 2021 Commission meeting, when the Commission meets to finalize these forms. Once published on the Commission’s website, the use of these forms is voluntary until April 1st when they become mandatory.

Will title companies be ready to receive option fees?

The Texas Land Title Association is working with their members to ensure title companies are aware of the changes and prepared to receive delivery of the option fee.

Addendum for "Back-Up" Contract (Form ID: 11-7)

12/05/2011

This Addendum is attached to a contract when another contract has already been executed by the Seller and another Buyer (First Contract).  It makes the contract that it is attached to contingent upon the termination of the First Contract.

Contracts, Forms & Applications, Contract Addenda, Real Estate Sales Agent, Real Estate Broker Individual, Business Entity Broker

In order to secure an option period for your client, they must first pay an option fee to the seller of the home. This is because of the legal principle in real estate contracts known as “valuable consideration.” Since the buyer is asking the seller not to accept offers for a certain time period while inspections are performed and are under review, it’s up to the buyer to compensate the seller for their time. That said, it can be tough to know exactly how much to compensate the seller, by what means the option fee should be delivered, and how to handle snafus in the plan. This article is written with you in mind: read on to find out more.

Option Fee in Real Estate

First, let’s discuss option fees in a bit more detail. Option fees are paid after the contract is signed, and the purpose is to give the seller a window of time (anywhere from 7-10 days, usually) in which they can terminate the contract and be refunded their earnest money deposit. Since earnest money deposits can be anywhere from $1,000-$10,000 (depending on the value of the property), it’s in a buyer’s best interest to pay the option fee. During the option period, inspections are scheduled and reviewed. If any issues are found, the buyer requests repairs and the seller can either make repairs or refuse to do so. (Of course, if the seller refuses to make repairs, the buyer can terminate the contract and be refunded the earnest money, as long as the seller is properly notified.)

How Much Should the Option Fee Be?

As we stated above, there must be a dollar amount attached to the option fee in order to make the option period legally binding. Option fees usually cost anywhere from $100-$200, although they sometimes cost up to $500 or under $100. The cost of the option fee is usually related to the value of your home since it’s a small percentage of its total cost. 

Will It Be Refunded?

Since the buyer pays the option fee over the table, sellers immediately deposit it. It’s rarely refunded at closing, but if your buyer would like to make an exception to that rule, it should be stated in the transfer contract before the option fee is paid. The buyer can also ask the seller to apply the amount to closing. Sellers aren’t obligated to apply this amount to closing, though, so consider letting the buyer know this. 

When to Deliver the Option Fee

Within three days after the contract’s effective date, the buyer must deliver the option fee. If the last day to deliver the fee falls on a weekend or legal holiday, the time to deliver is extended until the end of the next business day. Frank Gray, a top Realtor at Abby Realty, clarified that “Many agents are confused by this because they think that all weekend days and legal days are excluded from counting the delivery days. Let’s say the contract’s effective date is on a Thursday, so the agent counts Friday as day one, skips over Saturday and Sunday, counts Monday as day two, and Tuesday as the delivery deadline. This is incorrect. If the effective date is on a Thursday, Friday is day one, Saturday is day two. Since day three falls on a Sunday, the delivery deadline falls on a Monday. If the buyer’s agent misunderstands this and the deadline is missed, the seller has the right to cancel the contract.”

Where to Deliver the Option Fee

In Texas, the buyer must deliver the option fee to the title company. The buyer can deliver the option fee check separate from the earnest money deposit or the two combined (as a single payment). If the buyer combines the amounts, the amount is applied to the option fee first, and the remaining funds are applied to the additional earnest money. 

How to Deliver the Option Fee

The most common method of delivery is hand delivery to the title company. Alternatively, the payment could be sent via courier, via wire transfer, or via certified mail. In the past (before the updated TREC rules regarding the option fee delivery found in paragraph 5), buyers paid the amount directly to the seller or seller’s agent, and could even transfer funds via Venmo or another similar platform. Title companies seem far less likely to accept that method of payment, however, so you’d be better off choosing one of the delivery methods above. 

Receipt of Payment/Delivery

It’s crucial that the delivery fee is paid on time. However, that the payment does not need to be receipted (although that is helpful). You could be thinking, “If I don’t need the payment to be receipted, how do I prove it was delivered at all?” For legal reasons, it’s advisable to have proof of delivery. This can come in multiple forms. Sometimes, all the buyer needs to do is take a photo of them delivering the check. For buyers who chose to send it via courier, the receipt from the courier will likely be enough to prove delivery. Depositing it into certified mail (or overnight delivery) is another route you could take. 

What if the Buyer Wants to Terminate the Contract?

No matter how attached a buyer is to a home, there are things that can arise from inspections that may lead buyers to want to terminate the contract. If the buyer decides to terminate the contract, they must give notice to the seller in writing by 5 PM on the last day of the option period. As long as the buyer does this, according to Kimberly Howell Properties, they can legally terminate the contract and receive their earnest money back. “It gives the buyer the unrestricted right to terminate the contract. The buyer doesn’t need a reason to terminate within that timeline, they just have to say they want to terminate.” 

Maha Chaudhry said it another way on the Orchard blog: “During the option period, the buyer is free to walk away from the sale without penalty, whether it’s because the seller won’t budge during repair negotiations, the inspection uncovers severe issues, or they’ve simply had a change of heart. On the flip side, the seller can’t sell the house to anyone else during the option period, but they can still take backup offers.”

Conclusion

The option fee is a small and reasonable amount that is paid to the seller (via the title company). This fee provides the buyer security as the home is being inspected and negotiations are taking place. It protects the buyer from losing their (significantly larger) earnest money deposit should any issues arise during the inspection process. The option fee can be delivered in a number of ways, but it would be wise for the buyer to have kind of proof of delivery (though that’s not mandatory). If the buyer wishes to terminate the contract due to the findings gleaned from the option period, they can legally do so as long as they terminate it in writing by 5 PM of the last day of the option period.

If you’d like extra help with your transaction process, Close Concierge handles everything from contract to close. Our knowledgeable transaction coordinators maintain compliance while saving you time, so you can secure new contracts (and close more deals)! Contact us today for more information. 

Hi, I’m Sean and welcome to Close Concierge. I’m a licensed real estate agent in the state of IL (license #475202452). I’m also an active real estate investor and previously was CEO of a transaction coordination company, as well as a property manager. In total, I’ve been a party to more than 600 real estate transactions! I write on this website about once every week to answer some of the most common questions I come across on a day to day basis within real estate.