We often get asked about the option fee with a “back-up” contract. If buyers submit a backup offer and pay sellers an option fee, do the buyers get their option fee back if they never become the first contract? The answer is no. The sellers keep the option fee even when the first contract doesn’t fall through. By paying the option fee with a backup contract, the buyers pay for the right to terminate the contract even during the backup period. The buyers are not entitled to a refund of the option fee simply because they chose not to exercise the termination option.
David Jones, associate counsel
So then make the option fee smaller and write language to increase it if contract is made primary?
Try $100. If your Buyer doesn’t want to do that then move on. Don’t even mess with it. If your Buyer is motivated then it is worth the risk. If not then just send an e-mail (not a text) to the Listing Agent to let you know if there is a Termination. Let your Buyer know that by not doing the back-up they may be competing with other Buyers if there is a Termination.
I agree. However, option money is negotiable. Either way, it’s throwing away money for a contract that may never happen. I firmly believe if the back-up contract never makes it to first position, the seller should return the money.
I agree. Why should the seller get to keep the option fee if they’ve never been given the opportunity to be in first position. They shouldn’t have to pay it until they become first position.
I agree with you. The back up is only a back up until it becomes more. The inspections and option should be treated the same
But Seller is locking themselves into another contract should the 1st one fall through. Seller is not able to put back onto the market to possibly get a “better” offer. So the Seller is taking a risk also. That is why they should be able to keep the Option Fee.
If TREC wanted option fee to be increased in this case, the contract would be written as such. If you do this in special provisions, you are practicing law.
John, if she’s talking about altering the contract, you’re absolutely right! I read it as though she was responding to TAR.
This needs to be addressed by the Lawyer/Broker Committee. It violates the doctrine of fairness and unjust enrichment. The person addressing this subject needs to open the conversation with the appropriate staff to get this changed. The Seller has signed a backup contract subject to certain events transpiring in the future. The Seller benefits while the Buyer submitting the backup contract loses if the original contract succeeds, This doesn’t even make common sense. Responsible people surrounding individuals making these types of decisions need to weigh in. It’s decisions like this that make Brokers, Agents, and Buyers doubt the integrity of… Read more »
Why? The buyer certainly is getting something of benefit – they are a backup contract that falls into place immediately if the primary is terminated. If the buyer doesn’t want to tender much option fee, then write the offer with a small amount of option fee. It’s negotiable. If the seller wants more and the buyer doesn’t like it, they don’t have to enter into a contract.
I agree with you. I think more thought needs to be put into this. This could put liability on the Buyer’s agent advising a client to throw away money when we aren’t privy to the soundness of the first offer. I could see abuse. A seller could make money on back-up offers or a “Buyer” blame their agent for their loss. Etc. #BuyerBeware
More thought? More thought for what? This isn’t something proposed. It has always been this way. If a buyer blames their agent for the loss, then the agent didn’t explain the situation well enough for the buyer to understand the possibility of the loss.
You are right on the mark John. Not sure why this is so hard to understand for some
Option fees are never refundable. If it’s refundable, than it’s no longer an option. Keep in mind that “Option” is one sided and if it can be refunded by the seller than seller can cancel buyer’s option at anytime.
But option fees are “refundable” . They go toward closing costs if/when the transaction closes.
There’s a big difference between a “refund” and a “credit”. The option is credited at closing. No closing, no credit. Simple. We need to explain this to buyers that they are paying for the seller allowing the buyer to hold their place at the front of the line. There is a benefit to the buyer, and any buyer who squawks about losing $ 25 (or some other nominal amount) obviously doesn’t have enough money to deserve to buy a house.
The TREC contract states that the option fee is credited back to the buyer. Therefore, the seller does not keep the option fee if the transactions closes (it goes back to the buyer at closing). I am the seller and closing on a contract. The title company put the $300 option money towards what the buyer owes on the property. So ultimately, as the seller I gave up something and didn’t receive anything in return. 10.06.2021
TREC needs to address this issue. The option fee should be non-refundable.
Robogolf is correct. Doesn’t make common sense. The backup contract never became primary and the option never was valid.
Absolutely incorrect. It is a valid contract with a backup addendum. The option is completely valid (presuming the option fee is paid on time) and the buyer can terminate at any point. You might want to take some time to read both the contract and the addendum.
John, you’re wrong in that the back-up addendum expressly states in the last sentence of the first clause that neither party has a duty to perform, so valid contract? The actual contract is missing acceptance/performance due to the back-up addendum taking that element’s place. The back-up addendum is limited and specific acceptance/performance that expressly dismisses the actual contract performance until the back-up reaches first position.
Kristen… YOU are wrong. Buyer has every duty to deposit the earnest money and option fee, or the buyer would be in default. Even being in default does not invalidate an executed contract.
Not required to perform EXCEPT AS PROVIDED IN THIS ADDENDUM. Option Fee and Earnest money must be paid. This is a binding contract.
The option fee is “valid”. The buyer gets to cancel their promise to buy the property if the first contract terminates. John gets it. This entire string highlights the unfortunate truth that many agents don’t understand the nature and purpose of paragraph 23.
I agree completely
A Backup contract is nothing if the First holds. If it never comes into play then there should not be any monetary compensation to a seller.
Take some time to read the backup addendum. It is crystal clear that the option fee and earnest money are tendered. Why do you think there should be no compensation for the seller? In this strong market that often sees multiple offers, a seller may very well be leaving the opportunity to solicit multiple offers if the first contract terminates.
Terry this is incorrect the Back Up Contact is a CONTRACT that contains promises and obligations for both parties. The seller is not getting “free money” The seller is getting money and in exchange gives the buyer the right to cancel his promise to buy the property if the first contract terminates.
I do agree!
The back up offer is binding upon execution, with a contingency. That’s in the very first sentence of the addendum. If you think the Buyer didn’t get anything for their option fee in the event the first contract closes, how do you explain the Buyer’s guaranteed position as #2, and the Seller’s loss of right to negotiate anew after back up is executed?
Stephan, Addressing your first 2 sentences: Not necessarily true. The last sentence of the same clause states, “Except as provided by this Addendum, neither party is required to perform under the Back-Up Contract while it is contingent upon the termination of the First Contract.” The only thing the addendum provides are a guaranteed position behind the first contract (not necessarily #2), and an “unrestricted right to terminate” the back-up contract and then the period is extended if it the back-up makes it to first position. Which leads me to your next points… I see where you’re coming from when saying… Read more »
I recently (personally) was in a backup position on a property. The option fee allowed me to terminate when another, more desirable property came available. It cost me $100 but I got all my EM refunded!!!
That’s correct and had your option not been in force, you would not have been able to terminate your back-up position on the first contract and would have had to wait until termination of the first contract before you could contract the more desirable property. That’s why the option fee is not refundable and the buyer is buying a benefit whether the initial contract falls or not. The option fee is in effect on the effective date of the back up contract and ends on the number of days specified after the backup becomes primary. So Buyer can back out… Read more »
After rereading the 1-4 Fam Resale contract and the back-up addendum, it is clear the buyer forfeits the option money paid IF they choose to exercise their “unrestricted right to terminate” the back-up contract before it automatically terminates. I agree with this. HOWEVER, it is not mentioned what happens to the buyer’s option money when the back-up contract automatically terminates due to the fully executed first contract. Since law is expressed, not implied, the buyer should receive their earnest and option money back at the automatic termination of the back-up contract. I would fight for my client’s option money back… Read more »
Of course, nor does it state the option money will be returned like the earnest money. If the back-up addendum wants to state that neither party has a duty to perform under the contract while the contract is in back-up, how can the option clause of the actual contract can be enforced when it’s not a first position contract? Can a real estate attorney answer this, please?
And I suppose that you would argue that one should be able to demand a refund for a losing lottery ticket. The purchaser is buying an opportunity to receive a huge sum of money. Not quite the same, but also way lower probability of the purchaser receiving the ultimate benefit.
The Option Fee a provision granted by the Seller that is being sold upon execution of the Contract.
Once the Buyer delivers the check on time then that part of the deal has CLOSED. DONE DEAL. i TELL MY Buyer Clients: “SPENDING MONEY FOR THE SELLER!!!! That money is gone unless you close on the Property.”
I’ve always advised our clients to use the following, simple solution.
Our client pays $10 for their “backup” Option period and more, within 3 days, of the amended effective date if it becomes the primary. The same goes for their EM. They add this verbiage in paragraph 11.
Their risk is then only $10.
The option fee in all cases is a simple exchange…..money in exchange for the unrestricted unilateral right to terminate. The buyer and seller have executed a CONTRACT. Buyer PROMISES to buy the property if the first contract terminates and the seller promises to sell the property to this individual if the first contract terminates. The buyer pays the option fee so that they can get out of this PROMISE should circumstances dictate, for example they find another property they like better. Option Fee is NEVER refundable. When I teach CE contracts I use the analogy of a FITNESS CLUB. You… Read more »
For those that believe that the option fee is non refundable how do you determine the effective date of the contract that the option fee applies to? And being that you don’t know when your contract will become primary how would you select a number of days for the option period?
Read the Addendum…. slowly.
Ben buyers select the number of days your buyer wants for an option period. Option period doesn’t begin until the day the seller gives notice to the buyer that the first contract failed. That will be day one of the buyer’s option period.
.What Donna is saying is incorrect. The option period starts the day the back up contract is executed, continues until the seller gives notice to the buyer that the first contract terminated, and continues additionally for the number of days in paragraph 23. This is spelled out clearly in the addendum.
Hey fellow Agents… Did you forget the Back-Up Contract is a provision for the Buyer to have an “exclusive position” in the event the first contract is terminated? This too has value! Also the Buyer that is party to a Back-Up Contract with an Option Period has the right “to terminate the contract even during the backup period”. The “unrestricted right to terminate” still has value if someone is willing to pay for it. It is something the Seller is offering and a Buyer can offer whatever amount they wish. A Buyer can also just not buy the Option Period… Read more »
Stuart, you didn’t answer either of my questions.
Why isn’t the option paid when and only if the contract comes into first position? Seems like this should be something written in the back-up addendum that the option is only paid if the contract changes to first position. I can see paying the escrow as it’s the buyers good faith that they can move forward. But the option seems like a completely different situation.
Jenny, please read my comments above. The back up contract is a contract that contains promises and obligations starting from the date the back up contract is executed. If the buyer wants to get out of that promise they need to pay the option fee so that they have an option to terminate not only when the contract becomes the primary contract but also during the back up/waiting period.
If I do not pay my option fee within the 3 days and my earnest money what happens to the contract?
what happen if the buyer didn’;t pay any option fee or earnest money yet and decide to back out ?
Does the buyer get the option fee back if the seller backs out?