What’s the Difference between Option Fee & Earnest Money

Let’s start with what an option fee is. An option fee is kind of like a get out of jail free card. This is money paid to the seller (usually $100-$500) to allow the buyer to back out of the deal without any additional penalties. Now, this is only for a limited time which is stated in the contract, typically being about 10 days. This time frame is called the option period and it’s when the inspection and appraisal are done. This way if an issue with the house is discovered or you find another home that you love more, you can hop on out of that first deal. This money is almost never refunded.

Earnest money is basically the buyer letting the seller know they are fulling intending to purchase the home; sometimes termed as a ‘good faith deposit.’ This is usually about 1% of the purchase price and is held in escrow with the title company until closing day. At that time, the earnest money is put toward the down payment. If a buyer decides to back out of the deal after the option period but before closing day, that earnest money is usually paid to the seller.

Of course, all these terms are decided upon in the contract and can be negotiated if you’re a buyer wanting to sweeten the pot to have your offer accepted over the others. Understanding all the legal aspects of the contract is important and just another example of why working with me as your real estate agent is truly in your best interest.