Results Realty Buzz: The Texas "termination option" clause!

Informing you on the Real Estate Market in Spring Texas and the surrounding areas and other interesting tid bits!

The Texas "termination option" clause!

Texas termination option clauseIn Texas we have a "termination option" clause in our real estate contract that you will want to understand.  This clause allows buyers and sellers to negotiate a specified time during which the buyer can fully evaluate the house. For this right, they buyer pays the seller a nonrefundable "option fee". Your option period is typically that period of time where you do your home inspections however you can back out for any reason during this option period. 

Everything is negotiable but usually you will have put $100 (plus or minus) down for a 5 to 10 day option period. (These are not business days so time is of the essence.) This option period gives you the time to do your home inspections however  as I said you can opt out for any reason during this period and you will only lose your option fee; your earnest money will be refunded. Typically a seller will allow you 10 days but that time can vary.

Fully executed Texas residential contract!

This option period starts once you have finished negotiations and all parties have signed the contract; you now have a fully executed contract. Prior to this it was called an offer but you are now under a legally binding contract.  The option period starts counting the day after the contract is fully executed by all parties.

Foreclosures typically don not ask for an option fee but give you 5 to 10 days to inspect the property.  For foreclosures only this is often written in special provisions and it is usually addressed in the foreclosure addendum's.  I have found that many foreclosures only allow 5 to 7 days. These are not business days; time is of the essence and strict compliance with the time for performance is required.  I know that does not sound like many days but inspector's are use to being on this short notice and I have never had a problem with getting inspections done during that period.

If the inspections uncover more than you bargained for this is the time to back out.  Actually you can back out for any reason during this option period and the only money you will lose is the money you put down for the option and the cost of your inspections. The earnest money will be returned to you in full as long as you provide the owner a  termination letter in the agreed upon days. Again time is of the essence!

I have heard from clients that there are states where the only ramification of backing out at any time during the process  is losing your earnest money but that is not the case in Texas.   In Texas you will usually  lose your earnest money and you also may be sued for specific performance.  In my experience most seller's will just move on but they do have the option of suing.  Long story short the time to back out if you are so inclined is during the option period.

I have lived in four states and each state has handled the home inspection process in a different manner. Personally I like this process the best of those I have come across.

Subscribe to Results Realty BuzzSubcribe in a reader

Copyright © 2010 Marchel Peterson, All Rights Reserved. *The Texas "termination option" clause!!*

 

Comment balloon 22 commentsMarchel Peterson • August 14 2010 08:44PM

Comments

I have worked as an agent in Florida and California. Both of those states allow contingency periods for buyers to perform due diligence with an option of getting back escrowed funds. An exception could be an 'as-is' sale with specific clauses.

Posted by Vickie Nagy, Vickie Jean the Palm Springs Condo Queen (Coldwell Banker Residential Real Estate) about 9 years ago

In our standard California Association of Realtors contract there is no provision for payment of any option money for the due diligence phase of a contract. It's assumed by all parties that the buyers can have a standard 17 days for physical inspections, title search, and other investigations without payment of anything beyond their earnest money deposit.

It's interesting how different areas have evolved with different guidelines for how to do business. In California, the northern part of the state handles escrow and title fees differently than the southern part of the state. I don't know if anyone understands why this developed the way it did, but I'm not surprised that Texas and California have their own ways of doing business.

Posted by Dave Roberts (Healdsburg Sotheby's International Realty) about 9 years ago

Marchel, very different from CT. I can appreciate the fact that all they lose is the option money.

Our state works off a few different types of offers. One is an offer to purchase which does not become a contract, the other is a contract. Both allow for inspections, and I always write it something like this:

Inspections to be performed at buyers expense to buyers satisfaction within X no of days from accepted offer.

That covers it. Can the seller keep the deposit money if they don't follow through with the purchase? It depends, and it is a legal question which an attorney needs to answer. But have I seen it happen? Nope. But I have never had anyone walk because they just changed their minds.

Can they be sued for specific performance? You bet... if they just walk away because they changed their minds it is very possible.

Great info, and I love learning about other areas of the country. Your local readers are always enriched by your wisdom!

Posted by Andrea Swiedler, Realtor, Southern Litchfield County CT (Berkshire Hathaway HomeServices New England Properties) about 9 years ago

Surprising how different each state handles the inspection period. I too am from California where the standard time period is 17 days for all inspections and contingencies. That can be shortened or made longer by negotiation between buyer and seller before the contract is fully accepted by both sides. There is no option money for the inspection time period and no loss of Ernest Money if the buyer walks before the time period is up.

Posted by Steve Davis, Carlsbad CA (Davis Coastal Properties) about 9 years ago

Our contracts call for a 7 day upfront and you can back out or you can have the inspection within ten days of closing but have to close.

Posted by Charles Stallions, 800-309-3414 - Pensacola, Pace or Gulf Breeze, Fl. (Charles Stallions Real Estate Services ) about 9 years ago

Marchel, I am glad that Andrea explained how it works in Connecticut and cleared it up for me.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) about 9 years ago

Howdy and evening to you Marchel

Marchel, we don't have a termination option clause. Here a seller can keep all or part of the buyers earnest money, and here in the last few years. The sellers have been keeping all of the earnest money, if a buyer backs out for any reason. Even if it was because the seller did not want to fixing something that might even cost someone their life.

Have a good one
Dale in New Hampshire

Posted by Dale Baker, New Hampshire Relocation Real Estate Information (Baker Energy Audits and Commercial Properties Inspections) about 9 years ago

I think it is interesting to see how states handle this.  It's amazing how things differ from state to state. 

Posted by Joan Whitebook, Consumer Focused Real Estate Services (BHG The Masiello Group) about 9 years ago

Hi Marchel,

Ditto on what's been said about CA contracts.

Also, our contract is deemed "passive" meaning that the contingenies do not expire at the end of the time period, each and every one requires signing off.

(Btw, that's the opposite of our prior contract that provided for passive removal, meaning if you didn't object, contingency was deemed approved at the end of the time period stated in the contract).

As far as a seller suing a buyer here for specific performance, in CA it would be breech of contract. Specific performance here applies to a seller backing out.

Posted by Lynda Eisenmann, Broker-Owner,CRS,CDPE,GRI,SRES, Brea,CA, Orange Co (Preferred Home Brokers) about 9 years ago

Hi Marchel, There are so many different ways of handling this around the different states. I like our way best of te ones I heard. 17 days for due diligence requiring contingencies to be removed in writing. But the part of your process I think is odd, is that the Buyer has to buy anon -refundable  Option for the right to terminate during the due diligence period.

Posted by William Johnson, Retired Real Estate Professional (Retired) about 9 years ago

Marchel it is important for buyers to know their options.  NY is similar to CT and the contingencies are written as part of the offer.

Posted by Jennifer Fivelsdal, Mid Hudson Valley real estate connection ( JFIVE Home Realty LLC | 845-758-6842|162 Deer Run Rd Red Hook NY 12571) about 9 years ago

Good post Marchel!  Our termination option is always a surprise to many of our out of state buyers.  Everyone seems to like it though.  I do.

Posted by Ricki Eichler McCallum, Broker,GRI,ABR, e-Pro, TAHS (CastNet Realty) about 9 years ago

Marchel -

This is a perfect example of why folks can't afford NOT to use a Realtor.  You are paid to know all the in's and out's of Texas real estate law, they aren't.  Excellent information for potential Texas buyers.

MB

Posted by Michael Bergin, Northern Virginia Real Estate (Coldwell Banker Residential Brokerage - ABR - SRES ) about 9 years ago

Marchel,

Thanks for posting a very good reason why we are such an important part of any transaction.  We know the local rules, guidelines and laws.

Who can afford not to use us?

Dominick

Posted by Dominick Dina, MA, REALTOR®, GRI, e-PRO, TAHS, SFR, Notary Public (Christian Realty San Antonio) about 9 years ago

Marchel, you handle it much different in Texas than Louisiana.  The important thing, though, is that you are providing an excellent service by outlining the contract/procedure in advance.  Something we should all strive to do for our clients.

Posted by Mary Kay Hopkins, e-PRO,GRI,CRS (Mary Kay Hopkins, LLC e-PRO, GRI, CRS, CRB) about 9 years ago

VICKIE, It is amazing at all the different ways that the inspection period is taken care of by different states.  I do think all have some way of taking care of it.

DAVE, That's amazing that one state has two different ways of taking care of the inspection period but California is big enough to be several states. 

ANDREA, Thanks for sharing.  I also find it interesting to see what other states do with this issue.

STEVE & CAROL, If we put 17 days in here the seller's would totally freak out.  They have become use to 10 days or less.

CHARLES, So I'm assuming that 7 day upfront must be the time you usually would do your home inspections.  We also can have inspections after the option but then could not back out without consequences.

 

Posted by Marchel Peterson, Spring TX Real Estate E-Pro (Results Realty) about 9 years ago

GEORGE, Andrea did a good job of explaining what happens in CT.

DALE, Doesn't the buyer get a chance to look the house over before losing their earnest money?

JOAN, It is interesting to see how this is taken care of around the country.

LYNDA, I guess our contracts must be passive as if you don't sign something amending then the option just expires and you move on with the contract. Time is of the essence for the buyer.  Now if they amend the contract then time becomes of the essence for the seller.

WILLIAM, That option money does count towards the sales price if they continue on with the contract.  The only way a buyer loses it is if they walk.  The thinking is that the seller has taken their house off of the market for 7 to 10 days and they should be able to at least go out for a good dinner.

 

 

 

Posted by Marchel Peterson, Spring TX Real Estate E-Pro (Results Realty) about 9 years ago

JENNIFER, Ours is written in the contract also but you just fill in the amount and how long.

RICKI, It is the out of town buyers who seem to be surprised at how we do things in Texas.

MICHAEL, So true and we have an 8 page contract and that is without the addendum's.  When everything is added it is usually about 20+ pages.

DOMINICK, Each area of the country is specific to that area and it is so important to use a local agent that knows the ins and outs.

MARY KAY, It appears from the comments that Texas is unique in their termination option.  I have to admit Texas is just UNIQUE; which is why I LOVE IT here!

Posted by Marchel Peterson, Spring TX Real Estate E-Pro (Results Realty) about 9 years ago

Marchel, I really enjoy reading posts that show some of the differences between the states. It is especially nice when you learn more from the different comments. Thanks!

Posted by Steve Baklaich, Treating Buyers & Sellers to Full Service Always. (RE/MAX Results St Cloud Mn real estate) about 9 years ago

Marchel, never heard of that term before - but every state has it's share of differences when it comes to contracts and provisions. I remember coming from Oklahoma to Ohio where real estate contracts were HALF the pages I was used to, wondering why? Didn't Ohio think this was important? etc. on items I was used to having in print and enforceable.

Posted by Carla Harbert, RE/MAX Omega: Lorain-Medina County Area (www.LorainCountyHomeSales.com) about 9 years ago

Provides great protection for our buyers.  Gives them time to get their inspections done, and also make sure they can afford insurance on the house.

Posted by Richard Weeks, REALTOR®, Broker about 9 years ago

Richard, I love our termination option.  I have lived in several different states and each had different ways of taking care on inspections.  I like the option period the best.

Posted by Marchel Peterson, Spring TX Real Estate E-Pro (Results Realty) about 9 years ago

This blog does not allow anonymous comments