Keeping everyone’s options open
Did you know there’s an “undo” button for buyers in a real estate contract? Well, it’s not really a button, but there is a clause in sales contracts that allows buyers to cancel the whole deal, legally undoing the real estate contract. Paragraph 23 in the Texas Real Estate Commission residential sales contracts, the “termination option,” lets buyers pay a fee for the right to terminate their contract during a defined period of time.
The termination option isn’t a required element of a contract to purchase a home. However, most buyers make it part of their offer. The amount of the fee and the number of days of the option are negotiable. Whether you’re a buyer or seller, your Texas Realtor® can help you decide what is reasonable and necessary given the circumstances of your situation.
What’s it for?
During the option period, a buyer may terminate the contract for any reason and get his earnest money back. Most buyers use the option period to have a home inspection and otherwise evaluate the condition of the property. However, it doesn’t matter what the buyer’s reasons are for terminating the contract, as long as he gives notice of termination within the time specified in the contract. If the buyer doesn’t terminate the contract during the option period, the transaction moves ahead and the option fee is either credited to the sales price at closing or not, as negotiated in the original contract.
Why would a seller agree to it?
Sellers don’t have the ability to terminate the contract during the option period, but the termination option does provide benefits to the seller. First, sellers receive a fee in exchange for the buyer receiving his right to terminate. For example, if you agreed to a $200 option fee and the buyer decides to terminate his contract to your house, you keep the $200.
Second, the option period gives buyers time to perform due diligence and enter into the contract happy with their purchase. How does this benefit sellers? It’s better to sell your home to someone satisfied with the condition of the property rather than a buyer who’s bitterly disappointed that he ever agreed to buy your home. The truth is that if the buyer terminates the contract during the option period, you most likely got out of a transaction that would have caused you headaches and possibly a trip to the courtroom.
Buyers should …
As a buyer, make sure the option fee is an amount you are comfortable paying should you decide to terminate the contract. And don’t schedule inspections on the last day of the option period. You want to allow enough time to conduct inspections of the house and address any concerns you have about the property. Keep in mind you may need follow-up inspections. Also, if an inspection reveals conditions that lead to additional negotiations between a buyer and seller, a buyer will want those talks to happen during the option period, so he still has the right to terminate.
Sellers should …
While most sellers want to keep the option period as short as possible, negotiating hard for an extremely brief option period may work against you. If a buyer feels pressured and cannot get the information she needs in time, she may feel her best course of action is termination of the contract. Even though there’s an option on the property, sellers can continue to market the house and accept backup offers, giving those sellers a measure of protection in case something does fall through.
For more advice about buying and selling real estate, visit TexasRealEstate,com.
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