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Selling a House

Option Contract in Real Estate Defined

Understanding the option contract real estate definition will better prepare you for your next purchase or selling of a property.

Madison Clifton
Jun 4, 2019

Real estate jargon can be complicated.  Even when you’re familiar with the industry,  there are a lot of terms around the process of buying and selling that can be confusing. Have you ever heard the term option contract in real estate?  Well, we’re here to help you with the option contract real estate definition to make sure you’re informed for your next purchase or sale.

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What is an Option Contract?

By definition, an option contract in real estate is when a buyer and a seller agree on set price to either buy or sell a property at a later date for a monetary cost to the buyer. When an option contract has been signed, it means the buyer now has the exclusive right to buy the house at a set price until the contract’s time frame has ended. An option contract covers a set time period negotiated by the two parties. While the seller is not able to entertain any other offers for the property during the period of the contract, the buyer is never obligated to buy the property. This benefit comes at a cost though as the buyer forfeits the entire fee they paid when the contract was put in place. 

What is Included in an Option Contract?

  1. The option fee
  2. Duration of the option period
  3. Price at which the buyer could buy the property in the future

The option fee is decided through negotiation between the seller and potential buyer. This non-refundable fee can vary dramatically depending on factors such as the price of the property. The duration of the option period is also negotiated between the two parties. Meaning that period of time that the contract covers is specific to the parties involved. If the potential buyer does not purchase the property during this time though, the seller is free to sell the property to whomever they want while pocketing the option fee. The option contract real estate definition also references a price at which the potential buyer can buy the property during the duration of the contract. This price is fixed for the duration of the option period regardless of market fluctuations. It is important to remember though that an option contract is a legally binding entity, and if you think one would be beneficial to you it is best to involve a lawyer when creating it.

How it Benefits the Buyer

An option contract essentially allows a buyer to put a property “on hold” for a certain period of time without fear of losing it. An option contract gives potentially beneficial time to the buyer in order for them to secure financing or conduct inspections. It’s important to remember that not only is the property secure in the sense that it won’t be sold, but the price of the property is also secured. This quality of an option contract can be appealing in a market where the price of a property can fluctuate quickly. It is stated in the option contract real estate definition though that regardless if the buyer decides to buy the property or not, the seller still keeps the entire fee that was paid to them when the contract was enacted.

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How it Benefits the Seller

When an option contract is established it drastically limits the seller in their abilities. Sellers forfeit their ability to accept any other offers on their property, as well as being required to accept a previously agreed upon price for their property even if the value of it has increased. While these factors of an option contract can seem discouraging, the seller already has an extremely interested buyer for the property. The extended time option contracts allow can be useful to sellers as well because it provides them more time to relocate or conduct other business they may need to before closing a sale. The seller also is given the attractive benefit of keeping the fee the buyer paid to get the option.

The option contract real estate definition outlines advantages and disadvantages to both the seller and potential buyer in a transaction. So when considering an option contract it is important to evaluate if the benefits received will outweigh all the costs. But at the end of the day an option contract could provide you the time you need in order to buy your dream home.
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