Option Period, Earnest Money, and Financing Deadlines
Buyer and seller sign a TREC One to Four Family Residential Contract for $312,000. The effective date is May 1. Buyer pays a $300 option fee for a 10-day option period ending May 10 at 5:00 p.m. Earnest money is $6,000, delivered to the title company on May 3. The contract includes the Third Party Financing Addendum with a financing approval deadline of May 25. On May 9, after an inspection, buyer terminates in writing because of foundation concerns. On May 15, after the option period has expired, buyer's lender denies the loan; buyer terminates again and demands the earnest money. Seller claims both the option fee and the earnest money.
1. What happens to the $300 option fee and the $6,000 earnest money when buyer terminates on May 9 during the option period?
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Because the buyer terminated within the option period, the buyer used the right purchased by the option fee. The $300 option fee is nonrefundable and belongs to the seller. The $6,000 earnest money must be refunded to the buyer because termination during the option period is permitted for any reason, including inspection concerns.
The termination must be in writing and delivered before the option period expires. The title company should release the earnest money according to the contract and any required release form.
2. After the May 15 financing denial, can the seller keep the $6,000 earnest money?
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Likely no, if the buyer terminates properly under the Third Party Financing Addendum before the May 25 financing deadline. The addendum gives the buyer a contractual right to terminate and recover earnest money when loan approval is not obtained by the deadline, provided the buyer applied promptly and did not waive the financing contingency.
The seller's claim to the earnest money is stronger only if the buyer missed the financing deadline, failed to apply, or terminated for a reason not allowed by the contract. The title company will typically require a release signed by both parties or an escrow dispute process.
3. What if buyer had tried to terminate on May 12 for the same foundation concern, after the option period ended?
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The buyer would have no unilateral right to terminate for the inspection concern after the option period ended. The option period is the buyer's unrestricted inspection-termination window. After it expires, the buyer is bound unless the seller agrees to terminate or another contract provision applies, such as a seller default, a property-approval failure under financing, or a specific addendum.
If the buyer simply refuses to close, the seller may treat the earnest money as liquidated damages under the contract, subject to the contract's procedures and any negotiation.