When entering a real estate contract in Texas, one of the essential terms to understand is the Termination Option. This option can be a crucial part of a real estate purchase contract. Buyers and sellers should be familiar with its purpose and how it works. This blog post will explain a Termination Option and how it affects real estate contracts in Texas.
What is a Termination Option?
A Termination Option gives the Buying Party an unrestricted right to terminate the contract. There are two significant aspects of the Termination Option: 1) the amount called the Option Fee and 2) the number of days known as the Option Period.
Essentially, the Termination Option allows the Buyer to terminate the purchase contract for any reason and receive their earnest money back from escrow. Option Fee values vary depending on real estate type, contract size, and length of the Option Period requested. A seasoned real estate agent will advise on the industry norms for Option Fee amounts. Here is the Termination Option exert from the Texas Real Estate Commission (TREC) form for the Farm & Ranch Contract:
Why use a Termination Option in a real estate transaction?
A Termination Option grants the buyer time to conduct due diligence on the property. Buying parties can elect to perform home inspections, specialty inspections, mineral evaluations, and environmental testing to verify their investment analysis with a contracted price. Specialty inspections can include foundation, roof, septic, and hydrostatic water pressure inspections, to name a few. Termination Options are paramount when negotiating any contract with a dwelling or commercial structure of value.
Some real estate agents argue that Paragraph 7 of the One to Four Family Residential Contract and the Farm and Ranch Contract permit inspections regardless of the Termination Option election. Though true, the Buyer cannot terminate the contract or renegotiate if the Inspection has significant structural issues if the Buyer did not elect the Termination Option. Here, the buying party either forfeits their earnest money or buys a financial liability while advised by a real estate agent, creating a risk for litigation if problems surface after closing.
How is an Option Fee applied to the Sales Price of the property?
Once both parties have signed the purchase contract, an Option Fee amount is due with the Earnest Money directly to the escrow agent at the title company. This Option Fee is non-refundable whether the Buyer terminates during the Option Period or proceeds to the closing. TREC promulgated contracts authorize escrow agents to release the Option Fee at any time without further consent of the Buyer.
Do I have to use a Termination Option?
No, you do not have to use a Termination Option. Although it is highly recommended for most transactions relying on the structure’s value.
While most Residential and Commercial contracts have the need for a Termination Option, Farm and Ranch transactions vary. Unimproved, raw land transactions for only the surface estate may not need further due diligence. Land with conveying minerals may require a mineral evaluation for proof of ownership. Depending on the region of Texas, an analysis from a biologist may be recommended to analyze Oak Wilt, Anthrax, Chronic Waste Disease (CWD), etc. Any land with significant value in a house, shop or other structures should be inspected within the timeframe of the Termination Option.
In a hot land market, an unnecessary Termination Option can make the difference in one offer getting accepted over another. Brokerages that specialize in farm and ranch sales will be able to decipher the differences in each land transaction.
Conclusion
Termination Options play a vital role in Texas real estate contracts. Option Fees are non-refundable, and the Option Periods need to be long enough to complete inspections, reports, and proper due diligence. All contracted properties for Residential and Commercial structures of value need a Termination Option if the Buyer wants the contract to be “contingent on an inspection.” Land transactions are unique. Consult a licensed and seasoned Land Real Estate Agent for all your farm and ranch real estate transactions.
Contact a Campbell Farm & Ranch Land Specialist today to prepare your unique land strategy.