Option period: What is it and how does it affect the purchase and sale of homes

What is an option period?

An Option Period is written into a real estate contract to give the buyer a specific number of days in which they can rescind the contract and receive a refund of their security deposit. Its goal is to give the buyer time to learn more about the home through independent inspections and appraisals, negotiate repairs and other elements of the contract, and obtain approval for financing if applying for a mortgage. The buyers will pay the option fee to the seller that is not refundable, it’s the charge for review period and typically ranges from 100$ to 200$.

The option period usually lasts from 1 to 10 days. It begins the day after the acquisition contract is signed and ends at 5 p.m. local time on the specified end date. During the Option Period, the property is labeled as a "pending option" (OP). If the customer needs more time, they will potentially negotiate with the vendor to increase the option Period for extra days.

The Option Period allows the customer to terminate the contract for any reason without risk of losing their deposit. This is why the option period is usually only a week, although some buyers are given only a day or two, particularly if the house has multiple offers on the table or has only been on the market for a short period of time in hot weather. Real-estate market.

You can see why the vendor wants to cut back the amount of days within the Option Period as much as possible while giving the customer time for inspections. The longer the house is under OP, the less buyers will bother viewing the house because they assume the house will remain under contract.

How does the option period affect the purchase and sale of homes?

The option period is often a stressful time for buyers and sellers. Buyers are pressured to schedule and conduct their inspection, then wait for the results, obtain repair estimates, and negotiate any issues with the seller. The seller must wait patiently for all of this to happen, hoping that nothing happens to jeopardize the contract. Anything from a troubling inspection report to buyer financing issues and a low appraisal could cause the buyer to cancel the contract during this option period. And there are reasons to worry. Problems related to obtaining financing accounted for 30% of the problems that delay the settlement of the contract, followed by home inspection problems (19%) and appraisal problems (16%).

The option period is not a set period of time, but you can make your contract more attractive if you can minimize the number of days you request in the option period. One of the best ways to reduce the length of the Option Period is to eliminate so many reasons why you need an Option Period to get started. For example, if you need financing, you can get a pre-approval letter in advance to give you more confidence that a mortgage will be approved. Similarly, you can request the inspection and have your lender order the appraisal as soon as possible. This ensures that you get results quickly, within the option period, and have time to negotiate repair costs or request a lower purchase price if the appraisal is low.

Inspections

While a home inspection, report, repair offers, and negotiations can take several days to finish and extend the length of the option Period, home inspections are a decent thing for you as a buyer. Rarely, if ever, would you would like to bypass an intensive third party inspection.

As a buyer, it is critical that you know what you are buying, warts and all. If there is a major problem that will require a significant investment to fix, you should consider that cost before signing on the dotted line. The sale price of the house may be within your budget, but when you add in all the repairs, will that put you over budget? Does damage or poor conditions affect the integrity of the house, such as a cracked base, drainage problems, or structural problems? An inspection will reveal anything the seller has not yet disclosed, as well as check to see if the issues they did disclose have been accurately described.

Often the seller is willing to negotiate for repairs. They may be inclined to pay for some and not others, or lower the sales price by the amount of all expected repair costs. Either way, it would be unwise to take a home as is without really understanding what you're getting into. Home inspectors realize that they must work quickly, but thoroughly. They know you are within an Option Period and need time to work on your report, but even then, you can expect to wait 2-3 days just to receive the inspection report and potentially another couple of days to collect estimates of repair in order to know the cost of repairs and if it is worth negotiating with the sellers.

Financing approval

In addition to the home inspection, the option period may need to include time for the mortgage approval process and the bank appraisal. Unfortunately, the entire mortgage process, including pre-approval, home appraisal, and obtaining the actual loan, can take anywhere from 30 to 60 days.

One way to minimize this time is to get pre-approved for a mortgage before entering into a home sale contract. This way, you already know what you're approved for and what you're approved for, and you're not wasting that time in an Option Period. Keep this in mind as we talk about the next topic that can add time to the Option Period: appraisal.

Evaluation

When you obtain financing from a lender, the bank will require a home appraisal before lending you the money. Even if you consider the house yours, it is actually the bank's until you pay off your loan. They don't want to loan you more money than the house is worth, so they need an appraisal.

Like an inspector, the appraiser will evaluate the house, but isn't concerned about finding damage or wear to the house. Instead, the appraiser is solely observing the home's value based on similar homes that have sold in your area. They create a list of comparable homes and then adjust the price they think yours will sell for based on multiple factors, such as any features you've added to the home and also the overall condition of the house. The appraiser uses this information to determine what he thinks is a fair price for the home and provides a report to the bank, which usually takes 2-7 days.

If the sale price is higher than the appraised value, you may need to deposit more money to satisfy the lender's down payment requirement. If this happens, you will need to provide the funds, negotiate with the seller to lower the sale price, or cancel your contract. If this scenario occurs and your appraisal returns during your Option Period, then you can cancel your contract without losing your security deposit.

The question of financing is linked to the question of appraisal. If you take out a loan to pay for the house, you will also need to get the appraisal and you won't be able to get the appraisal until you have signed a home contract. So even if you get pre-approved for mortgage financing, you will still need to factor in the appraisal time when determining the ideal length of the Option Period.