What is the deadline for your buyer to pay an option fee?

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09/30/2016 | Author: TAR Legal Staff

What time does the option fee need to be paid by under Paragraph 23 in the One to Four Family Residential Contract (Resale)?

The buyer is required to pay the option fee within three days after the effective date of the contract. As no time deadline is specified, the option fee must be paid to the seller no later than 11:59 p.m. on the third day after the effective date. For example, if the contract effective date is October 1, the option fee must be paid by 11:59 p.m. October 4.

The 5 p.m. deadline for the option period in Paragraph 23 applies only to the notice of termination and does not affect when the option fee must be paid.

Categories: Forms, Legal
Tags: contract, contracts, option fee, option period, termination option period, legal, legal faq


David Davis on 10/30/2016

Rick DeVoss,

You are so spot-on with this post.  I cannot begin to count the number of times that I have had a client or customer (yes both) use the additional earnest money portion of the 1-4 contract to affect this very scenario.  So many times I hear them ask me: “Why should I pay the earnest money if I’m paying the option fee for the right to get a refund of the earnest money for any reason during the option period?”  They never really seeem to like the answer, “because it’s in the contract.”  The additional earnest money portion of the contract allows for extended deposit dates.

All too often, I get (encounter) inexperienced licensees (Agents) that will claim (and then seemingly be willing to argue to their grave) that unless there is earnest money upfront that there is no affective contract.  Same thing with the option fee.  This is NOT the case.  All that is needed to effect (create) a contract in Texas is a meeting of the minds of the parites.  In order for that contract to be valid (if it deals with conveyance of real property) it must be reduced to writing.  The signatures of the parties, indicates that meeting of the minds.  Earnest money (and option fee for that matter) are performance items of the contract.  What concerns me the most here is that this seems to be a case of brokers not taking responsibility for their licensees and coaching them properly and making sure that they have the training and knowledge that they need to both work and succeed in this industry.  I realize we all had to start somewhere, but if you are not willing to do the work and put in the time with the new licensees, maybe broker isn’t the role for you.  Just my $.02 worth!

Rick DeVoss on 10/29/2016

Jennifer—You are not the only one who is confused about what to do with Earnest Money.  Many agents who have been licensed much longer than you still have a problem with the concept.
....To be realistic, it is not possible to deliver the earnest money at the moment the contract is executed.  (It’s a silly term written by some attorney)  It can even be a challenge to deliver it within two business days, but that is considered an acceptable standard by most attorneys.
~Who is responsible for delivering the Earnest Money…? 
According to the contract, it is the Buyer.  But many agents feel it is best if they deliver it to the Title Company along with a copy of the contract.  You can do that either way, as long as it gets delivered.  ...I do NOT recommend giving it to the listing agent.  If you are representing the buyer, then it is your responsibility to make sure that either you or the buyer gets the money to the Title Company.  ~Document everything and cover your butt!
~Is Earnest Money a requirement to have a contract…?
We can have a legal contract and a closing without ever having any earnest money on the table.  But if the Contract says the buyer has to provide Earnest Money, then he has to put up the specified amount.
~Can it be done differently…?  ...Sure it can, providing you comply with the terms of the contract.
The Buyer and the Seller can agree on which date the Earnest Money is going to be delivered, and it Could be after the Option Period is satisfied.  ....I think it makes more sense to start the contract clock when the Option Fee is delivered (if there is such), and then to deliver the Earnest Money after the Buyer accepts the property in full, and terminates the Option Period.    That way you don’t waste all the time to deposit and refund the Earnest Money.  Since the buyer has the full right to a refund during the Option Period anyway, why bother depositing it…?? 
~Maybe it is time for TREC to consider revising our Residential Contracts, and specify things that are more in keeping with the real world.  (Let the Realtors on the committee write it, not the attorneys.)

David Davis on 10/12/2016

Jennifer Pittman,
That’s a great question.  We are living and working in the 21st century, and technology is everywhere.  It is not uncommon to have a contract signed after hours, or even on the weekend.  If I represent the buyer, I get that earnest money (or direct the buyer to do so) to the agreed escrow agent first thing the following business morning.

Jennifer Pittman on 10/12/2016

I have been a sales associate for a mere 9 months so please excuse my ignorance. I understand when the Option Money is to be paid.  As for the Earnest Money, I understand that this money is to be deposited to the title upon the executed date of the contract, however, what is the best practice when the contract is electronically signed by the final party and then submitted electronically back to the representing agent after business hours of the title company?

David Davis on 10/06/2016

Tarit Chaudhuri,
Wrong.  The contract is effective once it is executed by the parties.  Why is it that people cannot grasp the concept that all that is required to create a contract is a meeting of the minds, and the ratification of the contract (signatures) indicates that meeting of the minds?  Earnest money, option money, and all the other terms are performance items, nothing more.  Peformance of it’s terms is just exactly that.  Performance.  If one party fails to perform, they are in DEFAULT and typically the non-defaulting party may exercise any remedy at law.

NANCY LAMB,  You are almost correct.  The option fee needs to go to the seller or the listing broker.  I would ask the listing broker where they want it delivered to.  It must be receipted by either the seller or the listing broker within 3 days of the effective date of the contract otherwise there is no option period.  The option period starts on the effective date of the contract and it expires at 5pm (local time for the subject property-Texas has two time zones) on the date specified in paragraph 23 of the 1-4 contract.  Technically speaking the earnest money should be delivered before the option fee, as it is supposed to be deposited “upon execution” of the contract.

Tarit Chaudhuri on 10/06/2016

I have a suggestion to resolve all the arguments going on with Option Fee & Earnest Money deposit within 3 days after effective contract date. If I understand it right, at present system effective contract date starts when both Buyer and Seller sign the contract. Following are the suggestions:

(a) Contract will not be considered effective until both Earnest Money and Option fees are paid by Buyer.
(b) To simplify the process, let us eliminate the requirement of Option Fee check. Instead
negotiated option Fee amount will be deducted from the Earnest Money, if situation arises. In Commercial Contract it is done this way. Why it cannot be done in Residential?
(c) Seller has to allow 3 days waiting period for this collection as holding period. But no inspection will be allowed until the payments are made to make the contract effective

NANCY LAMB on 10/06/2016

Let me see if I have this correct. If you send a copy of the offer to the listing agent with a copy of the option fee check and a copy of the earnest money check made out to the title company. Then you have 3 days to make sure that the option check gets to the listing office to be received once the offer has been accepted with the time frame for the option period start and finish. So you would definitely want to make sure that the option period start would give enough time to get the option check to the brokers office for receipt. After that the earnest money and contract can be delivered to the title company or broker if they are holding earnest money. Am I correct so that I am in compliance. if not please feel free to correct me.

Stephen Williams on 10/06/2016

I must have missed the answers in the reading and re-reading, of several “answers”, just not answers to the questions I asked.

No worries.  These issues aren’t problems for me anyway.  I was just curious.

Thanks for your time!

Brian Cooper on 10/06/2016

Mr. Williams, The only thing that I can think of that might help clarify it for for you is the ‘Time is of the essence” clause at the end of the paragraph. Even though you have up to three days to pay the seller the fee , you don’t have an option til he has received it and the effective date clock could be ticking. You have to have to have a defined start date and termination date. It sounds like you just don’t like the three day window. Don’t know if that helps.

David Davis on 10/06/2016

Mr. Williams
At the risk of sounding like an attorney, which I’m not, already asked and answered.
All accounts.

Stephen Williams on 10/06/2016

To Mr.  Cooper:  I have no problem with the TAR explanation at the top.  (My question isn’t about deadline to pay fee.)  If paragraph 23 is “pretty clear” perhaps you can answer what Mr. Davis hasn’t.  Why does it say, “for a nominal consideration, the receipt of which is hereby acknowledged by Seller”, if a buyer has 3 days after the seller’s signature to pay?  And why does the contract say buyer has the right to terminate within “X” days of the effective date, if it means, “X” days from payment, as Mr. Davis claims? I’m just curious.  I’ve been smart enough to avoid problems for 30 years.

Regarding my earnest money question, Mr. Davis, I wasn’t talking about adding special provisions.  I’m asking why the form itself, or the law for that matter, can’t say that a contract that calls for earnest money (if it does) isn’t effective until said $ is tendered.  (Or at least provide the choice for parties to agree upon) And wondering why anyone would prefer it the way it is.

Again, I’ve avoided problems in this regard for 30 years by suggesting to my sellers that they simply don’t sign the contract until they’re comfortable that earnest money will be delivered timely, whatever that takes.

Brian Cooper on 10/06/2016

Wow, as a contracts instructor some of you guys are scaring me. Paragraph 23 is pretty clear, TAR’s explanation above is really clear, and David Davis couldn’t have said it any better! Sometimes I think sales people just over think what they are reading.

David Davis on 10/06/2016

Actually it’s a really bad idea here’s why.  Licensees can work for any number of parties in a transaction.

Kathryn Nelson on 10/06/2016

Good idea, Mr. Quick.  That would be so helpful, especially for those who are new to the business and still trying to find their way.

Edward Donald Quick on 10/06/2016

it would be helpful if the people involved in a discussion would be identified as to (a.)  - TREC rep; (b.) TAR - REP;  (c.) Buyer or seller; (d.) agent for seller or agent for buyer, etc. 
The identification of a party would help the reader understand where they are coming from - i.e.- the State/TREC; the TAR-rep ; agent/broker/sales agent; or general public.

Kathryn Nelson on 10/06/2016

Couple of things here:
1)  I’m curious about this discussion.  Is it a continuation from another discussion?  If so, it would be nice to have that situation included, or at least a link to it, so that one could catch up.  I opened it after reading the headline and quickly thought ‘there’s more to this story’.
2)  And it would also be nice to know from what authority or position (lawyer, broker, etc) one writes when a statement is made which interprets, or attempts to clarify, contract wording.

David Davis on 10/06/2016

Stephen Williams,
Correct, You (the buyer) cannot terminate until the option fee has been paid because the termination option does not exist until the fee has been paid.

As for the earnest money secenario, no.  That would be something outside the promulgated forms and considered the practice of law.  I know you’re thinking paragraph 11 (1-4 contract), but don’t!  Typically trying to change existing language already existing in the contract should not go in paragraph 11.  I like to tell new agents every word you put in paragraph 11 will cost you $100 of your commission.  That’s what the attorney will charge to clean up the mess you create in that paragraph!  TREC & TAR has provided us with promulgated forms for a reason.  USE THEM!

Brenda Renfrew,
You need to take the “emergency situation” completely out of the equation.  Those do not exist in a business/contract transaction.  This being said, if you got the option fee receipted within the three days, the termination option exists.

Stephen Williams on 10/06/2016

Mr. Davis:  While I sincerely appreciate your comments and efforts, I don’t really see that you’ve answered my questions.  If a buyer takes the 3 days after contract to pay the option fee, how does the seller acknowledge receipt of same upon execution?  And I understand the idea of “no option fee = no termination option” but what about the period of the 3 days?  Are we saying that you can’t terminate within the first 3 days until/unless you’ve paid the fee?  If that’s the case, does the option period start from the effective date of the contract, or from when the fee was paid?  (I believe contract to say it starts on effective date.)

Regarding the earnest money issue, I understand that earnest money is a “performance item” and that it’s not required to create a contract.  But if a particular drawn offer calls for earnest money, why not have the law/rule/contract say that the contract isn’t effective until the $ is delivered?  Wouldn’t that be more efficient?  I’m trying to imagine the scenario where earnest money is called for, isn’t delivered, yet anyone (including a buyer) would like to remain contractually bound to perform.  I’m sure that scenario is out there, but I’m not imagining it.

Brenda Renfrew on 10/06/2016

Let me clarify. The earnest money was made out to the title company and the option money was made out to the seller. Due to an emergency situation, I was unable to meet my clients and the listing agent agreed to meet them and take the checks. She called me the next day and told me she told my clients to hold onto the checks.  I was still within my 3 days to get the option money turned in and I did as soon as the listing agent told me she didn’t take the checks. I was frustrated that she had the checks given to her and she told my clients to keep them.
However, I feel that this opportunity to ask and or make comments should be respectful.

David Davis on 10/06/2016

100% Agree with Jason Peebles.  If you are foolish enough to have the check made out to your brokerage, make sure it goes into an escorw account.  Otherwise this would be co-mingling of funds and would be a violation under TREC rules.  Picking up a check made payable to the principal is perfectly acceptable and is likely considered one of the duties owed to a Client “Reasonable care and diligence” as well as “Obedience”.  In any case, as the listing broker, the duty to get those funds into the possession of the seller within the three days still remains.  For this reason alone, as the listing broker, I would make the seller available to the buyer or the selling broker for this part of the transaction.

David Davis on 10/06/2016

Stephen Williams,
The option fee is required to make the option period valid.  You answer your own question with the comment “the receipt of which is hereby acknowledged by Seller”.

The part about earnest money.  This is a performance item.  The seller can exercise any remedy at law if the buyer fails to timely deposit earnest money, but earnest money is not required to validate a contract.  All that is required to create a contract is a meeting of the minds.  The ratification by signatures indicates that there was such a meeting of the minds.  Earnest money is a performance issue.  Always has been, always will be!  It (earnest money) must be deposted upon execution of the contract.

Go close more deals!

Jason Peebles on 10/06/2016

Yes, Brenda Renfrew. Look at the contract, if you are utilizing the One To Four Family Residential (Resale), and on page 9 where the Option Fee receipt section is, note it states, “seller or listing broker” on the signature line for receipt. That is your indication that, if a seller is out of town or otherwise unavailable, the listing broker can sign. Now you asked if they can be paid to the seller’s agent? I’m not sure if you mean actually paying (as in..in the name of) the seller’s agent? Or simply paying as in delivering payment to the seller’s agent. But if it is the former, I would never suggest or do that. Simply have funds made out to the seller and deliver to seller’s agent if the seller is out of town, etc.

Stephen Williams on 10/06/2016

A few things I’m unclear about.  First, Mr. Davis says, “There is NO TERMINATION OPTION UNTIL THE OPTION FEE IS PAID AS AGREED IN THE CONTRACT”.  Will someone please show me where it says that in the contract?

Second, in the contract, what does “the receipt of which is hereby acknowledged by Seller” mean if the buyer has 3 days to pay it?  Is not the $ amount of option fee the “nominal consideration”?

Third (and admittedly off the subject of options and on to earnest money), can someone explain to me why the rule/contract/law can’t be changed so that a contract isn’t effective until/unless earnest money is tendered (assuming the contract calls for earnest money)?

Thanks for any help!

David Davis on 10/05/2016

This is a great point however the same rule applies

Doris Snipp on 10/05/2016

I think there should be clarification of date and time for additional option money to be deposited upon extension of the option period. It should state on the amendment.

David Davis on 10/01/2016

Sheryl Galvan, When was deliver of the earnest money ever three business days?

The 5PM deadline on termination option was greatly welcomed when proposed and presented.  Here’s why.  It stops the midnight dash to get a notice sent, and seller’s waiting up till midnight for a notice.  Get it in by 5PM.  If the parties need more time (days), negotiate for more time in the contract.  No more staying up till midnight wondering if the deal is going forward or not.  All of the brokers and the lawyers in the broker lawyer committee thought this was a great idea, as did the panel at TREC when it was presented to them for consideration.  If you disagree, you know you can attend these meetings and voice your opinion!

Sheryl Galvan on 10/01/2016

I can understand why the period of time to get the option fee to the Seller or listing Broker or Agent was changed from 2 to 3 days (calendar days), but I do not see the logic in removing the 3 day deadline (business days) to get the earnest money to the title company and replacing it with “upon execution of this contract by all parties, Buyer shall deposit…”  which falls into the realm of “time is of the essence.”
Also, what logic was used in setting a 5pm deadline for the expiration of the option period?  If you need a signature on a Termination and it is a weekday and your Client works…

David Davis on 09/30/2016

Lots of misinformation going on here.  You say the selling agent was doing something wrong yet you said the the buyers were your clients.  You have me confused.  The selling agent represents the buyers.  The selling agent or the buyer should deliver the option fee to the seller or the listing broker.  if the listing broker refuses to accept the option fee the funds should be delivered directly to the seller typically at the subject property address or at the address for delivery of notices if it is different.

Brenda Renfrew on 09/30/2016

Thanks for the input David. I made sure and got the option money to the agent before terminating. There was no incompetence on my part and made sure that was taken care of.  I just felt the selling agent compromised the situation by not taking the checks when they were given to her previously. She was the one that refused to take the checks. I did my due diligence by having them provided to her. It’s hard to have checks provided only to have the agent not take them .

David Davis on 09/30/2016

Brenda Renfrew, If your buyers terminated before they paid the option fee they were in violation of the contract.  I hope this is a case of mistaken grammar in that the buyers paid the option fee and later terminated the contract, otherwise you failed miserably as an Agent and have subjected your client and yourself to great liability through your own incompetence, or misguidance.  There is NO TERMINATION OPTION UNTIL THE OPTION FEE IS PAID AS AGREED IN THE CONTRACT.  As such the buyer has no right to terminate the contract, and no right to get the earnest money back upon failing to perform under the remaining terms of the contract.  If the buyer fails to perform under the contract, the seller may exercise any remedy at law.

Brenda Renfrew on 09/30/2016

My buyers wanted to view the property again only 2 days into the contract. I was unable to show it because I had just had surgery and the listing agent agreed to show it. My buyers tried to give her the option and earnest money but she told them to hold it until they were sure about the home. It put me in a very odd situation. My buyers terminated the next day but paid the option money.  I was upset that she did not take the checks.

David Davis on 09/30/2016

Stay on point here folks, option fee, and the option period has nothing to do with inspections.  While it is commonly used to conduct inspections, the two have nothing to do with one another contractually.

As for the earnest money, it is to be deposited upon execution of the contract.  If it is not, the buyer is in default of the contract, and the seller may exercise any remedy at law.

As for the buyer backing out before the payment of the option fee, that would not be allowed.  The termination option period does not exist until the option fee has been paid and tendered to the seller.

Tarit Chaudhuri on 09/30/2016

What happens if Buyer performs the inspection and decides to back out of contract within three days before paying the option fee? Can Seller deduct it from Earnest money? I believe there could be a three days waiting period for Earnest money as well. If the earnest money was not paid within three days either, what is Seller’s option to be compensated, if Buyer backs out after inspection within this three days waiting period?

David Davis on 09/30/2016

@ Brenda Renfrew Yes it can.  That is why there is a place for the listing broker to receipt the option fee on the contract.  The listing broker assumes responsibility for the funds, and may not co-mingle the funds.

Debbie Russell on 09/30/2016

This Blog is “super beneficial” - keeps us all on our toes and up to date; I the reminders and love sharing the info with others.

Brenda Renfrew on 09/30/2016

If the seller is out of town, can the option money be paid to the seller’s agent?

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