Residential Contract Termination Period Fees
Oh what joy it is to find the perfect house! You’re agent has sent you the MLS listing or you have driven past the house of your dreams and can’t wait to discuss it with your agent. It is often rumored that residential real estate is 100% emotional. The feelings and sensations we attach to the overall aesthetic appeal of the home drives us to almost rush to closing. Then the Termination Period begins….
Submitting the Offer
A few obvious items may come up when negotiating the offer that reflects the Buyer’s willingness to pay the Seller’s price. The Buyer’s agent will address the following items:
1. Is it priced at market value?
2. What is the area’s discount rate?
3. What have homes sold in the area?
4. Were those homes true comparables?
Knowing what to offer is the key to submitting a contract that will be accepted.
TREC 1-4 Family Residential Contract and the Termination Period
“23. Termination Option: For nominal consideration, the receipt of which is hereby acknowledged by Seller, and Buyer’s agreement to pay Seller $___________(Option Fee) within 2 days after the effective date of this contract, Seller grants Buyer the unrestricted right to terminate this contract by giving notice of termination to Seller within _____ days after the effective date of this contract. If no dollar amount is stated as the Option Fee or if Buyer fails to pay the Option Fee to Seller within the time prescribed, this paragraph will not be a part of this contract and Buyer shall not have the unrestricted right to terminate this contract. If Buyer gives notice of termination within the time prescribed, the Option Fee will not be refunded; however, any earnest money will be refunded to Buyer. The Option Fee will will not be credited to the Sales Price at closing. Time is of the essence for this paragraph and strict compliance with the time for performance is required.”
How much should a Buyer pay for the Termination Period?
The Termination Period, also known as the Option Period, is your time for Due Diligence. When deciding how much consideration (usually a dollar amount) to provide for the Termination Period, the Buyer and Agent must choose wisely. People fail to see the importance of the Termination Period and risk the consequences that may possibly invalidate the unrestricted right to terminate the contract. Consideration is a tricky concept when it comes to the common law interpretation of contracts. It is the value paid for a promise or intent to enter into a binding agreement and places both Buyer and Seller on notice that enforceable duties will be set forth. Different markets allow for different consideration amounts and the price of the property is definitely taken into account. In Houston, it is common to calculate 0.75% - 1% of the contract price to be the Option Fee. A $250,000 house may secure a $2,500 Option Fee but can be negotiated for less or more depending on the demand and contract offer. If there is a possibility of multiple offers, a slightly higher Option Fee may be more enticing to the Seller who is considering the offers. The amount of the Option Fee is ALWAYS negotiable!
Interpreting the Termination Period
It is extremely important to know that Paragraph 23 of the TREC1-4 Family Residential Contract applies ONLY when the blanks are filled in and the Option Fee has been paid within the time allowed (TWO days). When applied, it gives the Buyer the right to terminate the contract within the agreed amount of days. A court however can, which in 2004 did, enforce a Termination Period even though the nominal consideration noted in the contract was not paid because the parties DIDN’T use TREC promulgated contract forms. TREC stands for the Texas Real Estate Commission. The contracts that Realtors use in Texas are commonly promulgated forms created by TREC. Please consult an attorney if you are not using the TREC forms and request their interpretation.
Why would a Buyer terminate during the Option Period?
This includes but not limited to the following:
1. Inspection Report findings
2. Insurance & CLUE Report findings
3. Survey Issues such as encroachments, etc.
4. Title Commitment Issues such as liens, etc.
5. Flood Determination Reports
6. Seller Disclosure or Non-Disclosures
7. Buyer’s Financing
8. Property does not satisfy Underwriting Requirements
9. Property conditions and repair estimates
Time IS of the Essence
Please note that the “time is of essence” clause is in bold in the TREC1-4 Family Residential Contract. This verbiage is a term that indicates that the parties to the agreement must perform by the time to which the parties have agreed. A delay in the payment of the Option Fee may and could possibly void the Termination Period altogether. The Buyer can try to get out of the contract later for other reasons so please consult your real estate attorney. It is essential that the Due Diligence Period must be completed by the timeframe given on the contract. It is common for contract offers to be submitted with a photocopy of the Option Fee check and the Earnest Money check showing intent to pay. The form does allow for two days but the Seller may risk the Buyer not providing the Option Fee in a timely manner and could lead to non-enforceable termination period. If the Seller receives an Option Fee check…the Buyer has established a valid option to terminate.
Let me show you the way...
I understand that finding your new home is just one of the tasks that face you when you're purchasing a new house. I can assist you in the home buying process which includes offer negotiations, assisting in the inspection and negotiations process after inspections. Beat other home buyers to the hottest new homes for sale in Houston with my
Sincerely,
Diego E. Jaramillo
Realtor, ABR, e-Pro
Keller Williams Houston Metropolitan
Cell: 832-282-2069
Online at www.HoustonHeritage.com
Request a Free Market Snapshot!
"Because my business is primarily based on referrals, I thank you in advance for your endorsement. If you or anyone you know are considering buying or selling a home, please think of me."