Option Fee and Earnest Money – What Are They?

You have found the home of your dreams and you made an offer – congratulations! If you are like many buyers, you did not read every single word of the 1-4 Family Residential Sales Contract. You were excited, a bit frazzled and probably busy, but you needed to get that offer in. Now, you’re looking back over it and trying to make sense of the legalese and what you have agreed to. You submitted two checks with the offer, but you may not be completely sure of why. Let’s talk about the option fee and earnest money, and what they represent.

Earnest Money is a good faith act that you intend to buy the home. This payment shows the seller that you aren’t just putting in offers on every house you see. This house is the home you want to buy, pending everything checks out, and you’re willing to put some money down to show your seriousness. Earnest money is typically 1% of the offer price on the home, but can be more, especially in multiple offers situations. On a $100,000 home, this fee is $1000. This fee is paid to the title company and remains in escrow until closing, at which time, it may be applied to your closing costs, if stipulated in your sales contract. If you decide at any time to back out of the purchase of the home, your earnest money is forfeited and paid to the seller as damages. There are two exceptions to this rule, though. First, if you are unable to obtain financing within the financing period as stipulated in your sales contract, your earnest money will be refunded to you. Additionally, if you elect to back out during your option period, the earnest money will be refunded to the buyer.

The Option Fee is a small fee a buyer pays to a seller for the option to terminate a real estate contract. Depending on the terms of your sales contract, this fee may also be applied to your closing costs. This fee is typically paid for a specific period of time where the buyer has unrestricted option to back out of a purchase and still retain the earnest money.  Most often, the option period is 10 days and the fee is 0.1% of the offer price. However, this can vary with multiple offer situations.  0.1% of a $100,000 home is only $100, and that is a small price to pay for the option to change your mind. The option period is the time where you perform your due diligence, and if you aren’t satisfied with the results you can still change your mind, at very little cost. During the option period, buyers will conduct standard inspections such as a general home inspection or wood destroying insects (WDI) in some areas. If time permits, they’ll even order supplemental inspections such as for the roof or foundation, if recommended. You can even request to extend the option period by a few days, for a fee, if the general home inspection reveals something that requires a deeper look.  This fee is not refundable should a buyer decide to terminate their contract or unable to obtain financing.

Angel Fultz is here to answer all of your real estate questions and hold your hand through the buying and selling process. Contact me at any time to learn more about how I can help you!