I wanted to answer a question I get asked all the time and that’s about earnest money and option money. These are two things that get paid immediately upon becoming a contract. First you have an offer…you put in what you would like to have happen…the seller answers back…yes…no…I accept it…I don’t accept it…you go back and go…”Okay, I’ll do what you’ve said.” So, it kind of goes back and forth and back and forth for a minute until everyone agrees to agree and everyone is signed off on it. And then you have a contract, right? And it’s ready to go to the title company, right? You have promised in the contract to give the seller or give the title company for the seller earnest money.

That money that says, “I earnestly want your home and I’m going to go through with this contract until I buy it.” At which time that money’s going to come back to me in my closing costs. Instead of paying say a hundred thousand for a house, when I put 5,000 in earnest money, I would be paying 95,000. Right? The money’s going to come back to you. However, if you walk away from the contract and you have no outs, you just decide one day, what was I thinking, I don’t want to buy this house. You’ve passed your financing contingency. You’ve passed your option period. You’ve passed everything there is to get out of the contract because in the contract, there are many sentences that say, this must happen, or the buyer will get their earnest money back, right? There’s many sentences in the contract that do say this, that this has to happen, or this is the result of that.

But after a point, there are no more outs in the contract. You just have to be ready to move forward. If you lose your job or whatever happens, you don’t want to buy this house. That’s what earnest money is for. That’s the damages that the seller’s going to take for keeping their house off the market for however long you kept it off the market. Earnest money is just that, it comes back to you at closing. Option money is a whole other fee, and that is for the unrestricted right to terminate the contract for any reason, within so many days. Right now with the market moving as fast as it is, it’s usually about seven days is about all you’re going to get on that. That’s the period of time for you to do all your due diligence.

Do you have to do your inspections during that time? No, you don’t. Would it be logical to do your inspections during that time? Absolutely. Because if something’s going to fall out, it’s usually because of inspections. Meaning that you did your inspections of the house and there was just so many things wrong, or so many big things wrong, or things that the seller said they had done. But in fact, maybe weren’t done well and you just decide, you know what, I don’t want this house. No matter what the seller agrees to do, or doesn’t agree to do, I don’t want this house. There’s too much wrong with it. It worries me. Whatever the reason, you don’t owe the seller an explanation, within seven days, you get to terminate the contract. You lose that option money, whatever it is you put up there, but you get your earnest money back. That’s the difference between earnest money and option money.

In the State of Texas, you cannot have an option contract without paying some consideration, some money. You can’t just say, I want an option period and not pay the money. Our contracts read that you have three days to get that money to the seller. We have new contracts that are coming out here in about probably 15-30 days that now the option money and the earnest money will all go to the title company and that will certainly make our life easier. But the way it reads right now, the option money goes to the seller, the earnest money goes to the title company. That way at closing, if you do move forward to closing that option money comes back to you as well.

Earnest money and option money are paid within three days of becoming an effective contract. Those amounts are negotiable. Typically, we see 1% of the sales price as earnest money, but it can be more than that. And the fact that you’re going to get it back, what difference does it make, how much you put in there? What if it was a $300,000 house and you decided to put 5,000 in earnest money, that’s just money you don’t have to pay when you get ready to close, right, because it’s going to come back to you.

At the end of the day, think about it that way, your earnest money is a little savings account for the money that you’re going to be putting down on the house. It’s money that’s going to come back to you many times over during the contract. What’s important is that you read the contract, or that your realtor explains to you what’s in that contract, and at what points in the contract could you get your earnest money back if the seller doesn’t perform, like they’re supposed to. Important that you read that little thing that you’re signing, right? That’s you read that contract, but earnest money and option money, that’s how that goes and hope that explains that just a little bit better.