Congratulations, you have secured the property and are in the agreed upon option period! Once a contract is signed by both parties, the property goes from Active to Active Option in MLS. This means that other agents are notified that the property is being actively pursued by one particular buyer. Sometimes the home may still be shown to other agents and their clients in hopes of securing a back up offer, but this is at the seller's discretion. It is generally accepted that as a courtesy to the buyer(s), the property will not be shown to other parties. Of course in a sellers market this may be overlooked more than in a buyers market. As with everything in real estate, it is negotiable! The title company within the first week or so of a contract being executed will issue you a preliminary title policy. A preliminary report is a report prepared prior to issuing a policy of title insurance that shows the ownership of a specific parcel of land, together with the liens and encumbrances thereon which will not be covered under a subsequent title insurance policy. [RS-1] A preliminary report contains the conditions under which the title company will issue a particular type of title insurance policy. The preliminary report lists, in advance of purchase, title defects, liens and encumbrances which would be excluded from coverage if the requested title insurance policy were to be issued as of the date of the preliminary report. The report may then be reviewed and discussed by the parties to a real estate transaction and their agents. Thus, a preliminary report provides the opportunity to seek the removal of items referenced in the report which are objectionable to the buyer prior to purchase. [RS-1] The most critical page of the preliminary title policy is the Schedule C section of the document. These are the issues that have come up that need to be resolved before the title company will issue you a bonafide title insurance policy. Other things from the preliminary report that should be focused on are You will be interested, primarily, in the extent of your ownership rights. This means you will want to review the ownership interest in the property you will be buying as well as any claims, restrictions or interests of other people involving the property. The report will note in a statement of vesting the degree, quantity, nature and extent of the owner’s interest in the real property. The most common form of interest is “fee simple” or “fee” which is the, highest type of interest an owner can have in land. Liens restrictions and interests of others which are being excluded from coverage will be listed numerically as “exceptions” in the preliminary report. These may be claims by creditors who have liens or liens for payment of taxes or assessments. There may also be recorded restrictions which have been placed in a prior deed or contained in what are termed CC&Rs conditions and restrictions. Finally, interests of third parties are not uncommon and may include easements given by a prior owner which limit your use of the property. When you buy property you may not wish to have these claims or restrictions on your property. Instead, you may want to clear the unwanted items prior to purchase. In addition to the limitations noted above, a printed list of standard exceptions and exclusions listing items not covered by your title insurance policy may be attached as an exhibit item to your report. Unlike the numbered exclusions, which are specific to the property you are buying, these are standard exceptions and exclusions appearing in title insurance policies. The review of this section is important, as it sets forth matters which will not be covered under your title insurance policy, but which you may wish to investigate, such as governmental laws or regulations governing building and zoning. However, it is very important to remember that the preliminary report does not completely disclose the condition of the title to a property. It is not a written representation as to the condition of the title and may not list all liens, defects, and encumbrances affecting title to the land, but merely report the current ownership and matters that the title company will exclude from coverage if a title insurance policy should later be issued. Also remember that a preliminary report is not the same as title insurance. However, you can protect against title risks prior to the close through issuance of “binders” and “commitments”. A binder is an agreement to issue insurance giving temporary coverage until such time as a formal policy is issued. A commitment is a title insurer’s contractual obligation to insure title to real property once its stated requirements have been met. Discuss with your title insurer the best means to protect your interests.

At this point if you have not already, coordinate with your agent to deliver the Option Fee and Earnest Money checks as time is of the essence for both of these items. There is a specific amount of time in which these checks must get to the seller and title company respectively, or the deal may be in jeopardy before it even starts. As a good rule of thumb, you and your agent should get these to the Seller and Title company immediately. The contract plainly states the exact time period you have to get these checks in and we will review these below. One important key term to understand before we go into these dates is the Effective Date of the contract. This is the date that all things are based off in the contract and it is established when the contract is executed by the last receiving agent and is sent into the title company. For example, the buyer's sign the contract and their agent sends it in to the listing agent. Then the listing agent presents it to the seller(s) who decide to accept the offer and sign it. It then goes to the listing agent and they, as the last receiving agent, would execute the contract and send it to the agreed upon title company. After all of these steps are performed, the Effective Date is established and the option period begins (if the buyer has opted for it). However, in some cases sellers may include a “time is of the essence” clause in the contract. Watch out for this phrase in your paperwork—it means the closing date for the sale is binding. If you can’t make it to close for any reason, you’ve breached the contract and could lose your deposit. So keep in mind that your contract usually sets out a specific time frame in which you’ll need to secure financing, get the home inspected, and be available for the closing. However, as long as you’ve made a good-faith effort to adhere to the timeline, sellers will grant a reasonable extension if a lender drags his feet or there are other extenuating circumstances that delay things.

You will need two separate checks and they will be written out to two different entities. The Option Fee going to the Seller is to secure the agreed upon option period. This fee may either be applicable to the sale of the property or not, it must be denoted in the contract you and your agent prepare. It is important to discuss strategy with your agent about this nuance as the temperature of the market will hold some weight to this situation and could make you stand out of the crowd in multiple offer situations. The Option Fee must be delivered to the Seller by 5 pm of the 3rd day of the Effective Date of the contract. If the Option fee is not delivered within that time frame, the buyer no longer has the unrestricted right to terminate the contract. The Seller may choose to terminate the contract at this time. If your agent delivers the Option Fee to the listing agent's office after the 3 days have passed, the agent has the ability to verify with their clients whether or not they still want to accept the check and grant them their option period. If the listing agent is not present at the office and the selling agent (Buyer's agent) is dropping off the check after the 3 days they may or may not be able to deliver those checks based on that broker's rules. In general, option fees aren't eligible to be refunded. Since they're relatively small and accrue directly to the sellers who demand them, this isn't usually a deal breaker for buyers. For buyers who won't accept contracts that fail to provide for non-refundable option fees, sellers may be amenable to pro-rating the closing costs accordingly. However, all bets are off after the option period's expiration. [RS-3]  Here at Briggs Freeman Sotheby's International Realty, we have a stamp that says accepting the check does not equate to acceptance on behalf of the seller. Some brokers may not accept the check at all and request the selling agent contact the listing agent directly to verify the seller's wishes.

The Earnest Money check is to be delivered within 3 days of the Effective Date of the contract to the title company identified in the contract. If the check is not delivered within 3 days of that date, the Seller has the right to terminate the contract or to enforce specific performance from the Buyer. Specific performance is holding the buyer's feet to the fire and making them fulfill their contractual promise to buy the property for the agreed upon sales price and conditions. Earnest money payments are larger deposits that are generally held in escrow until closing. A given earnest money deposit's value will fluctuate in accordance with the vicissitudes of the housing market and the purchase price of the parcel. Normally it will exceed the value of the parcel's option fee by at least a factor of 10. In frothy housing markets, earnest money deposits of 3 percent of the home's list price aren't out of the question. While many earnest money payments are refunded after closing, others are not. These issues must be worked out during the drawing-up of the transfer contract. [RS-3] In a sellers market a seller might be less inclined to do this as they may have another buyer in the wings. In a buyer's market, the seller may consider this option more often. Going back on the market is typically unfavorable as it raises questions as to why that happened. Some agents change their MLS explanations to highlight the reason for the BOM status but other's will not. Keep in mind, that all agents must treat each other fairly. So if a property does go BOM and the selling agent inquires about the reason, the listing agent should be willing to cooperate and provide the reason as long as it is not confidential information and is reasonable. Earnest money deposits are refunded or pro-rated on a regular basis. Generally speaking, buyers that withdraw from purchase contracts after discovering undisclosed structural flaws or other serious issues are entitled to full refunds. Buyers who withdraw on their own account may be eligible for partial refunds. The precise terms of earnest money refunds are decided on a contract-by-contract basis. Refunds are generally issued as closing-time discounts. [RS-3]

Like everything real estate related in the state of Texas, the Active Option period is negotiable; with a 7 day buyer's due diligence period being standard. Depending often on the age and condition of the property, a buyer might want to secure a longer option period to give them more due diligence time - though even on an older home, asking for a longer option period weakens the attractiveness and relative value of the offer. This is especially true in a Seller's market where competing offers may have shorter option periods and effectively a shorter amount of time to close. 

It wouldn't seem reasonable to ask for a 14 day option period on new construction (more on new construction/builder contracts later), just like it wouldn't be reasonable to have only a 3 day option period on a house built in 1910. In a very competitive buying situation, buyers will often constrict the amount of days of the option period to make their contract stand out from the crowd of other offers. With this being said, it is important for the buyer to be in communication with the vendors they wish to do business with, such as inspectors, during the option period to see if their schedule will permit them to come during the specified time. Agents are not supposed to recommend only one vendor, which is why Briggs Freeman Sotheby's International Realty has accumulated a list of vendors that our clients have personally used and have had a good experience with. We call this our Resource List and it is a valuable tool that available to our clients. 

It's not uncommon for cash buyers, especially sophisticated cash buyers in relation to investment properties, to have no option period at all. They may be builders with a keen eye on the lot itself or any other number of reasons. There are even some investors who try to secure properties without even seeing them. Their reasoning aside, we as agents will still always recommend an inspection be performed because the due diligence period is crucial for the buyer to find out everything they can about the property. If the buyer was unable to ask their title company prior to securing the property to find out deed or building restrictions, this would be the perfect opportunity to do so. You may want to build a pool in the backyard but there may be restrictions that prevent you from doing that. It would save you a lot of heartache finding this information out before rather than after. Or you may have horse trailers that you need to store on the property but there might be a strict HOA that won't allow you to. The more you know, the better it is to help you make the important decision whether to stay or walk from the property. 

Option periods are a wonderful security for buyers because one can terminate for ANY reason within the option period without risking earnest money. If one chooses to terminate a contract, the seller has the right to keep the amount paid for the option period (option fee). If the buyer chooses to proceed with the purchase, the option fee may be refunded to the buyer at closing (if the contract was negotiated this way). [RS-4] This brings up another reason why the option period is so important - the unilateral agreement with the ball in your court. As a buyer with an option period, you have the unequivocal right to refuse the property during the specified time period with or without reason. The seller is bound by the contract to sell their home to you for the agreed upon price and may not retract the contract during the option period. Without an option, you are buying the property blind. Just a reminder, the option fee that you paid to secure the property for your option period is non-refundable. However, the earnest money is available to be returned to you if you decide to walk away from the property during the option. This is why it is extremely important to be aware of all the dates pertinent in your contract. If you decide to walk away from the property even an hour past the end of your option, you may not be eligible to get the earnest money returned to you as the contract has gone hard. 

Inspections are a very important part of the option period, though as mentioned above, not everyone chooses to get one. Believe it or not, on an FHA loan you are not required to get an inspection- though any agent worth their salt would still encourage their buyer to acquire it. An inspection can reveal areas that need additional attention. Based on this the buyer can choose to get the opinions of a variety of experts. It is the buyer's responsibility to procure the vendors for the inspections. This is to protect the integrity of the service being provided. 

When you are working with new construction and are working directly with the builder, you will see that the contract is substantially different from the one that is promulgated by the Texas Real Estate Commission. Keep in mind that the selling agent's commission is commonly already built into the price of the home regardless as to whether you have representation or not, so if you are considering buying a custom home and working with a builder it is worth enlisting the help of a real estate agent to represent your needs. Their contracts are typically created by a lawyer representing their interests and are longer than the promulgated standard contract by TREC (Texas Real Estate Commission). One of the biggest distinctions is the option period. Most builder contracts do not have an option period and the buyer does not have the unequivocal right to refuse the property for a specified amount of time. It is important to read through the entire contract and getting the advice of a lawyer before signing!

Option extensions are also relatively common when necessary. If a buyer's inspection finds safety or major system repairs (roof, plumbing, electrical, foundation) that are needed, closer inspection can prolong the due diligence period. Many times the listing agent will be amenable to extending the option period for another day or two, while the buyer finishes his research. Most of the time it is a matter of getting qualified contractors to come by the property and detail the scope and price of the work that's needed so all of the numbers are known and a healthy negotiation between buyer and seller relating to the repairs can progress. Being sure to get plenty of quotes from contractors for needed repairs during the option period not only helps substantiate repairs for negotiating purposes, it gives the buyer a sense of which contractors they want to work with in the future and will save them time getting the work done once the house closes. Negotiations for seller concessions or price negotiations are tackled during the option period. 

Once the buyer has made it past the option period, the contract in title terms goes 'hard' and the earnest money is now in play if they were to walk away without cause. Most buyers will be contingent on mortgage financing, but the new addendum promulgated by TREC could negate this buyer "out". The Addendum Concerning Right To Terminate Due To Lender's Appraisal offers three different options with two being extremely favorable to the seller. The first option being the most favorable to the seller states that the buyer agrees to pay the agreed upon purchase price regardless of what the property appraises for. The second option states that the buyer will pay the agreed upon sales price if it appraises at a certain amount. The third option which is most favorable to the buyer states that if the appraised value of the property is not at or above the sales price, the buyer has the option to terminate within a given amount of days as stated in the addendum as long as they provide the seller with the appraisal document. 

The MLS status after the active option period now is changed to 'Pending' status. It's critical for the buyer and the buyer's agent to consistently be in touch with both the title company's closer and closer's assistant, as well as the mortgage broker. This is to ensure that any and all required items to be remedied by title before closing (typically listed in Schedule C of the preliminary title report) and for the mortgage broker to have all the forms necessary completed are accomplished. It is also necessary for the buyer to schedule a closing date with the title company at a time that suits their needs and at a time that is available with the title company. It is worth noting that Friday's are generally the busiest days for a title company as they are scrambling to get the deal done before they close and in turn may affect the funding of the property and possession by the buyer. The worst day to close is the last day of the month because it is the busiest day for the title company. This is some behind the scenes insight, but mortgage brokers typically get paid on the 15th of the month for all of their commissions from the previous month. Another way of putting it is that they get paid 15 days out after each month relative to their commissions. Why does this matter to the consumer? Mortgage brokers will disproportionately push through deals at the end of the month, in order to get their commission check on the 15th coming up rather than having to wait 6 weeks. This makes it harder to acquire a closing date at the end of the month. 

The typical buyer uses a mortgage, and if a mortgage is needed, the buyer's agent will need to fill out the Third Party Financing Addendum. Third party financing is any loan you take to purchase a home – this can come in several different forms: conventional loans, Texas veterans loans, FHA loans, VA loans, USDA loans, and reverse mortgages (they are not often used to buy homes, but it is possible). As the loan requires approval (in various forms) by the lender, the Third Party Financing Addendum ties the approval process to the contract so that if a buyer is unable to obtain the loan, they have ways to get out of the contract [RS-5]. The most common amount of time for a buyer to get personal approval of financing is 21 days, but like every other area of real estate contracts in Texas, everything is negotiable. An important distinction is though in this example of having 21 days to get a mortgage financing amendment, that applies to the actual buyer - not the house. What this means is if the buyer has a mortgage commitment from his lender within 21 days and after the 21 days the house isn't mortgageable, the buyer is not in default of the contract.

Once the option has passed, negotiations are made and title and mortgage are secured the deal is ready for closing!