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Understanding Earnest Money Vs. Option Fees

Updated: 6 days ago

Earnest money and option fees are both components of a real estate contract, but they serve different purposes and have distinct characteristics. So to make things easier for homebuyers and sellers we have broken down the difference between the two and how the deadlines for each are calculated.

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Earnest Money

Purpose: Earnest money, also known as a good faith deposit, is a sum of money that a buyer provides to the seller to demonstrate their serious intent to purchase the property. It shows that the buyer is committed to the transaction.

Calculation: Earnest money is a deposit made by the buyer to demonstrate their serious intent to purchase the property. The amount is negotiable but is usually a percentage of the home's purchase price (e.g., 1-2%). Deadline: The deadline for the earnest money deposit is typically specified in the purchase agreement or contract. It's often a certain number of days after the contract is signed. For example, it might be due within 3 to 10 days* after the effective date of the contract.

Refundability: Earnest money is typically held in escrow and may be refundable under certain conditions outlined in the purchase agreement. For example, if the buyer backs out of the deal for reasons specified in the contract, they may be entitled to a refund of the earnest money. Application: Earnest money is applied toward the buyer's down payment and closing costs at the time of closing. If all conditions of the contract are met, it essentially becomes part of the total funds the buyer brings to the closing table.

Option Fees

Purpose: The option fee is a payment made by the buyer to the seller for the unrestricted right to terminate the contract within a specified option period. This gives the buyer time to conduct inspections, appraisals, and other due diligence without the risk of losing earnest money if they decide not to proceed.

Calculation: The option fee is a payment made by the buyer to the seller for the unrestricted right to terminate the contract within a specified option period. The amount is negotiable but is typically a few hundred dollars. Deadline: The option period is also specified in the contract and is negotiated between the buyer and seller. It's the timeframe during which the buyer has the unrestricted right to terminate the contract for any reason. The option fee is due at the beginning of the option period, and the period is usually 7 to 10 days*.

Refundability: The option fee is typically non-refundable, regardless of whether the buyer decides to proceed with the purchase or not. Application: Unlike earnest money, the option fee is not applied to the purchase price or closing costs. It is a separate payment made for the right to terminate the contract within the specified option period.

Important Deadline Reminders

*The treatment of weekends and holidays in real estate transactions, specifically regarding earnest money and option fee deadlines, can vary depending on the terms outlined in the purchase agreement and local real estate customs. Here are some general considerations:

Weekends: In many cases, deadlines specified in real estate contracts, including those for earnest money and option fees, typically include weekends. If a deadline falls on a weekend or legal holiday, it may be extended to the next business day in some jurisdictions, or the contract may specify that the deadline holds even on weekends.

Holidays: The treatment of holidays depends on the terms of the contract and local practices. Some contracts may explicitly state that if a deadline falls on a recognized legal holiday, it will be extended to the next business day. In other cases, the contract may not make special provisions for holidays, and deadlines may still apply on those days.

Communication and Agreement: In many real estate transactions, parties can negotiate and agree to modifications of deadlines, including extensions. Clear communication between the buyer and seller, often facilitated by real estate agents, can help ensure that both parties are aware of and agree to any adjustments.

💡Tip: Download and utilize our Earnest Money Deadline Resource Guide to help you stay on track!

It's crucial for both buyers and sellers to thoroughly review the terms of the purchase agreement, including any provisions related to deadlines, and seek clarification from real estate professionals or legal advisors if needed. Additionally, local laws and customs can influence how these matters are handled, so consulting with professionals familiar with the specific jurisdiction is advisable.

Still have questions on earnest money and option fees? Being a realtor founded title company, our team at Willow Bend Title Company is highly educated and experienced in handling all of the various types of real estate transactions and is always ready to assist in answering your questions. Contact us today so you can rest assured that your real estate purchase or sale goes as smoothly as possible.


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