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What Is an Option Fee?

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  • Written By: John Lister
  • Edited By: S. Pike
  • Last Modified Date: 01 November 2016
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An option fee is an additional payment made by a buyer to a seller in a real estate sale. In return for the payment, the buyer gains the right to pull out of the deal during a certain period, even after formally agreeing to the sale. The use of an option fee is almost entirely restricted to Texas.

The existence of the option fee in Texas comes from the fact that most real estate sales there involve a standard form developed by the Texas Real Estate Commission, a state government agency. These forms include provision for an option fee by default. It is not mandatory to use the option fee, nor indeed to use the commission forms, but they are widely used as a matter of course.

An option fee is normally around $100 to $200 US Dollars (USD), though the amount is negotiated between the buyer and seller. The two parties also negotiate a duration for the option clause to be negotiated: this is most commonly around 10 days. During this period, the buyer can cancel the deal without having to give reason and without any further consequences.

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The main purpose of an option fee is to allow the buyer time to further examine the property without the risk of somebody else making an offer. This time bought can include both carrying out inspections and waiting for the assessments of expert advisers. It can also allow time to renegotiate the sale price in the event of the inspection throwing up any surprises. Supporters of the concept say that it can also benefit sellers as it averts potential buyers’ being deterred by the risk of buying a property without having a chance to fully inspect it.

The option fee should not be confused with earnest money, which is a payment, usually in the range of a few thousand USD by the buyer, to demonstrate that he or she is serious about his or her intention to buy a property. The money is not paid directly to the seller but rather put into escrow with a third-party company. If the seller decides to pull out of the deal, the money is returned to the buyer; if the buyer pulls out of the deal, the money is forfeited to the seller. If the deal goes ahead the money goes to the seller and forms part of the buyer's total payments.

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Logicfest
Post 2

@Soulfox -- The article uses a different term to describe escrow money by calling it earnest money, but the concept is identical regardless of what it is called. I only point out this distinction because you see the terms "earnest money" and "escrow money" tossed around quite a bit but they both mean the same thing.

At any rate, escrow money and option fees are very similar in that they motivate the buyer to follow through on a sale. Where they are very different is that escrow money is generally refundable whereas an option fee is not. And, yes, you do see both of these fees regularly put up by prospective buyers in Texas.

Keep in mind, however, that

escrow money is not always refundable. There are times when deals fall apart and the buyer's money is not returned. Any buyer should read the details governing any fee put up prior to a sale whether we're talking about an option fee, escrow/earnest money or anything else. People get in trouble by not reading the fine print and relying on statements made by other people who may or may not know what they are talking about.
Soulfox
Post 1

I am confused. What is the difference between an option fee and the escrow money that is routinely put up by a buyer in real estate transactions? Are they one in the same for all intents and purposes? Could we see both an option fee and escrow money put up in a real estate sale in Texas?

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