One of the most important aspects of buying real estate is making sure you know what you are getting into. Getting a property under contract is only the first step. Usually financing is involved and your lender has many requirements that must be met before you absolutely get approved for your loan. It’s just a part. Usually, when you get a property under contract, you’ve just judged the book by its cover; you haven’t really read the book yet. For several years now, there has been a way to consult the book before making a purchase. Real estate transactions often involve what are called call options. Whenever you have an option in a contract, it basically means that you have purchased the right to terminate the contract. For example, there is a “Lease with option to purchase”. In this scenario, the buyer has the right to lease the property and has paid the seller an option fee that applies to the purchase price if they make the purchase on a predetermined date. However, if he chooses not to close the sale, the seller keeps the option money. Option-to-purchase leases can include purchase options of several thousand dollars.
Now let’s talk about what is called a “termination option”. Nowadays, when a buyer gets a property under contract, they will pay the seller a nominal (insignificant) sum of money for the right to terminate the contract for any reason, for a certain number of days that the buyer and seller agree to. This number of days generally varies between 10 and 30 days. A face amount can range from ten to one hundred dollars. The number of days and the amount of money must be agreed by the buyer and the seller. The essential purpose of the opt-out period is to give the buyer time to thoroughly examine the property, such as performing a whole house inspection. A buyer could even terminate the contract on a whim and the seller would keep the option fees but the buyer would get their deposit back. The money earned can range from several hundred to several thousand dollars. Also keep in mind that when a buyer enters into a contract to purchase the property, they will usually agree to buy it in its current state “as is”.
Let’s say I entered into a contract to buy a house and hire a state licensed inspector to inspect the house. As the inspector inspects the property, he finally has the opportunity to check the central heating and air. Inspection reveals that the system is not functioning properly and probably needs to be replaced. With this information in hand, I ask my agent to tell the seller’s agent that I want the seller to install a new system or lower the price of the property so that I can afford a new HVAC unit. The seller can say “No, you have agreed to buy the property in its ‘as is’ condition and I will not make any concessions. What will be my answer? “Yes, I have agreed to purchase the property in its ‘as is’ condition, but I am also terminating the contract under the terms of the termination option I paid for. The seller keeps the $ 75 option fee I paid and I get my $ 1,000 deposit back.
If that’s what the seller decided to do, they’ve probably made a big mistake. Why? Because he now has to disclose to any potential buyer that the HVAC is defective. If he doesn’t, he is breaking the deceptive marketing practices law, which can be triple the damages when the seller knew or should have known about the problem.
Whenever you get a property under contract, be sure to pay a termination option fee for your best protection. If the seller does not agree with the termination option, it should set off a red flag and you should back out of the deal.
Mike McEwen is a real estate broker with 32 years of experience in the field.