Monday, March 2, 2009

NORTHWEST AUSTIN REAL ESTATE: Exploring the option period.

NORTHWEST AUSTIN REAL ESTATE: Exploring the Option Period. What is an option period? What needs to be done during the option period? Why is an option period important for a homebuyer? What rights do home sellers and home buyers have during the option period?
I work with a lot of of first time home buyers. I also tend to work with a lot of first time home sellers and what I like to call long time home buyers (people that have not purchased a home in a long time.) For most of these people a few questions come up about the option period. Here in Texas, you can negotiate an option period within a purchase contract to buy a home.

What is an option period?

In the Texas Association of Realtors form (TAR 1601) "One to Four Family Residential Contract", Paragraph #23 titled Termination Option basically states that for a negotiable amount of money, the buyer receives the unrestricted right to terminate the contract within the negotiated amount of time.
Generally, the option fee is equal to about ten percent of the earnest money which is generally one percent of the purchase price. Ex. ($200,000 house X 1% = $2000 earnest money X 10% = $200 option period fee.) This is negotiable so the fee could be as low as $1 and it could also be higher to give the seller some added assurance that the offer is solid. The time period is also negotiable but is generally about 7 to 10 days.
When the deal goes through to closing, the option fee is generally credited to the buyer but again, this is negotiable.

What needs to be done during the option period?

The main thing that should be done during an option period is for the buyer to order and pay for a property inspection by a Licensed Inspector. This generally costs about $400-$500. The inspector goes through the house for a few hours and inspects all systematic and structural conditions. The main things that are inspected are the HVAC (heating and air) systems, roofing, foundation, electrical and septic systems. The inspector also looks at windows, siding, appliances and a number of other features in the home. The inspector furnishes the buyer with a promulgated inspection report with their findings. The inspector may also advise the buyer to have certain items inspected by a specialist in the field. (HVAC, Septic, Foundation, Electrical. Basically the "major" issues listed above. Inspectors can only let you know if a system is possibly malfunctioning and an idea of what it may be. Then the buyer needs a specialist to look into it in more detail.The buyer can choose to terminate the contract based on the inspection, go through with the contract as is or negotiate the repair of items or an amount of money in lieu of repairs or treatments. This is not a time to renegotiate other terms of the contact. It is important for buyers and sellers to be comfortable with the deal the way it is put together in the executed contract without regard to the Option period. Buyers that come back to the sellers with a laundry list of repairs that "need" to be made are usually less successful than buyers who only ask for repair or allowance for "major" issues found in the inspection. How are you supposed to know the difference? Make sure you are working with a knowledgeable Realtor and an informative inspector. Many times, there are no major issues so a negotiation of additional terms is not necessary.

Why is an option period important for a home buyer?

When you are looking at a home, you are most likely looking at the aesthetic features of the home, trying to figure out if the home is right for you, wondering if your furniture will fit, asking questions about the neighborhood, etc. As an agent, I try to point out any red (or red tinged) flags that I may see in a home. The inspection brings those issues to the surface in detail. It also brings up all of the possible issues that you don't see in a typical home showing. For example, I don't generally crawl around in the attic to look at the ducts or take the electrical panel off. I would do it but I am not an inspector and it is always best to work with a specialist.
This is important because a major repair or issue may detour a buyer from the property they thought was perfect.

What rights do home sellers and home buyers have during the option period?

The buyer should be allowed reasonable access to the home for the inspection and resulting meetings with specialists and/or contracts to get bids to have repairs completed. With the option period, the buyer has an unrestricted right to terminate the contract during that time while the seller is bound to the contract as agreed. In case you are wondering, the right to terminate is actually unrestricted which means the buyer can back out for an endless number of reasons including but not limited to; cold feet, buyers (contract) remorse, job loss, financial changes, and anything else you can think of. The seller has the right to cash the check made out to them for the option fee and they also have the right to deny, fulfill or negotiate any request for repair or allowance of issues in the home.
This time period is generally a stressful time for all involved in the transaction but, if the buyer and buyers agent address the issues that they can in the original contract and then address any major issues that may come up in the inspection, the option period can be a little less stressful leading to a successful purchase and closing of the buyers dream home.

Posted by Brian W Martin REALTOR for The Pinnacle Group of Keller Williams specializing in Assisting Buyers and Sellers to make educated decisions in Real Estate transactions in Northwest Austin, TX

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