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Options Fees vs Earnest Money: What’s the Difference?

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Minute details of the real estate market can be confusing to both buyers and sellers alike. Real estate documents contain complicated jargon, making it difficult for even the most experienced buyer to understand. Before making an offer on a home, there are two up-front costs to be aware of: Options Fees and Earnest Money. Both are important pieces to remember when negotiating your contract. Keep reading to learn the difference between the two.

Option Fees

An option fee, or option money, is a non-refundable fee paid to the seller by the buyer within 72 hours of the agreement (also known as an execution). It is the fee paid to the sellers for agreeing to provide the right to terminate the contract without reason or cause for a given period of time. The amount of time provided for the “option period” is negotiated by you and your agent with the seller. The seller is being compensated for their time as they cannot accept additional offers during this period. The option period does not give you any other rights other than the option to terminate. The buyer is allowed to do their due diligence and inspect throughout the contract period. However, the option period provides a period of stronger negotiation, as the buyer could back out if the sellers do not come to an agreement with buyers regarding any number of possible changes that could be brought up. If the buyer does change their mind about the property, they can terminate the contract but will not get their fee back. If a buyer does not pay the option fee and elects to terminate, they must have cause for termination. You only are allowed the option period if the option fee is paid.

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By utilizing an option fee, the buyer can determine if they want to proceed with their purchase without the stress of other offers and with little penalty if they do not decide to move forward. The buyer has the freedom to fully evaluate the condition of the home and the total costs associated with the move, including reviewing loan options with their lender. Consider striking a balance between taking the time needed to evaluate your decision and also finalizing the deal to give the seller the certainty they need. A shorter option period is usually going to be more attractive to a seller, no matter the cost as everyone’s ultimate goal is to get you to closing on your new home! One piece that’s great to remember is this fee is always going to be credited to your contract at closing. This is a recent change to Texas rules, so no matter what amount you pay, if you continue with the purchase of the home, you will see that money as a credit toward your purchase in the end. This is great news for buyers, especially in the recent crazy market!

Earnest Money

Earnest money is another upfront fee paid within 72 hours of contract acceptance and is known as a “good faith deposit”. Not only does it show a buyer’s intent to proceed with the purchase of the home, but it also protects the seller in the event that the buyer backs out of the deal. Since a home is not available to contract on while it moves through the closing process (baring other specific situations we will discuss in later blogs!), the seller risks a financial hit if the deal falls through. The deposit is paid to a title or escrow company for holding and these funds are not released to the seller without express agreement from both parties. This only occurs at the termination of a contract. The amount of earnest money is negotiable and dependent on the circumstances of your offer. The generally accepted deposit is 1-3% of the home’s purchase price but can be more or less depending on the needs of the buyers, and the requirements of the sellers. If the deal falls through due to the various contingencies negotiated in the contract, the buyer will likely get their earnest money refunded to them. The refunding of earnest money however IS NOT guaranteed. If you do not terminate with reason or cause (provided by those contingencies, after your option period ends) it is possible the seller demands release of the earnest money. But don’t let this scare you! Your choice to terminate should be discussed with your agent before you decide to move forward with it. They will advise you on the best way to proceed and are there to help protect you and your hard-earned money.

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