What Is An Option Fee in North Carolina? Part I of II
Currently in North Carolina buyers have a choice when they are making an offer on a home. Alternative #1 or Alternative #2 on the “Offer To Purchase and Contract” form. Alternative #2 was introduced to the “Offer To Purchase and Contract” form back in 2004 and has rarely been used. I believe that is because there has been very little education as to how to properly utilize Alternative #2 therefore the benefits of Alternative #2 (Option Fee) have not been effectively communicated to buyers.
Alternative #2 is used when an Option Fee is selected in Paragraph 4(c) on the “Offer To Purchase and Contract” form.
What is an Option Fee and how does it benefit a Buyer and a Seller?
An Option Fee is a negotiable amount of money that is paid up front to a seller of real estate. The Option Fee is paid directly to the seller and is his/hers to keep regardless of the outcome of the transaction. There are several ways that your Realtor® can help you determine a fair amount for an Option Fee:
- Divide the sellers current mortgage payment by 30 days and then multiply the per diem by the number of days you need for the Option.
- If the home is owned Free and Clear then the Purchase Price would be multiplied by 8%, divided by 365 days to achieve your per diem amount.
The Option Fee then automatically dictates that you select Alternative #2.
Alternative #2, under section (a), allows you to enter a Termination Date. The Termination Date is negotiable as well and several factors should be considered before determining the date:
- Type of inspections the Buyer wishes to conduct
- Time needed to conduct all inspections and any follow up
- the amount of the Option Fee paid to the seller
During that Option Period the Buyer shall have the right to terminate the contract for any reason or no reason, whether related to the physical condition of the Property or otherwise provided that the Buyer delivers to the Seller written notice of termination by 5:00pm on the pre-agreed Termination Date. So, you see? Alternative #2 is much less confusing that Alternative #1 (which stipulates MANY dates to keep up with).
What is the benefit to the Buyer?
- A Buyer can terminate the contract for ANY reason – ANY REASON or NO REASON – up to 5:00pm on the pre-agreed Termination Date.
- It buys time for the Buyer to complete ANY inspections that they would like to have preformed.
- A Buyer can request any repairs they wish, even if the repairs are outside the scope of repairs listed in Alternative #1.
- A Buyer WILL receive credit for the Option Fee should the transaction close (in addition to the Earnest Money provided)
What is the benefit to the Seller?
- A Seller is compensated for the time that their home is Pending (off the active market).
- Less dates to keep up with for inspections than stipulated in Alternative #2
- A Seller may still have the property marketed and receive back-up offers.
- The Option Fee Amount is completely negotiable as is the Option Period.
It was mentioned above that the Buyer can request repairs that are not in the scope of Alternative #1 – in What Is An Option Fee Part II of II I will provide a guideline for which a buyer can conduct their due diligence. The guideline will benefit the seller as well in that they will know what a buyer will be looking for!