OPTION PERIODS … in today’s market

What is an option period? In short, it's when the buyer does all their due diligence. Inspections, making sure the home is insurable and how much that cost. Does it require flood insurance? If so, how much does that cost? Are any follow up inspections needed? The HVAC. The foundation. The plumbing. All of this happens during the option period and it’s s flurry of activity. During this time, the buyer has the unrestricted right to terminate the contract, at any time, for any reason. All they stand to lose is their option fee. How much is the option fee? Pre-pandemic, they would range from a couple hundred dollars to possibly $1000 if it was a competitive situation. Now, they range anywhere from $1,000 to $25,000. On my last sale - at $1.5m - the option fee was $10k. If the buyer backs out, no matter what the reason, the seller keeps the option fee. All of it. That’s the price of tying up the property.

Now why have option fees become so expensive? Couple of reasons. One, it's just another way for buyers to better their offer in this hyper-competitive market. It’s more skin in the game. Two, with many offers being submitted "sight unseen", we're seeing more terminations. That tends to happen when a buyer hasn't actually seen the home in person. Virtual can only get your so far. So listing agents have responded by escalating option fees, because terminations - no matter what the reason - don’t look good. Nothing worse than going on the market, going Pending quickly, and then coming back on the market after a termination. You lose all your momentum! And now your stigmatized. Buyers and agents automatically think something is wrong with the property. Why else would a buyer kill the contract? It’s also meant to be punitive. No BS about it. It doesn’t really hurt to lose $500, but it does hurt to lose $10,000.