Question: What is an option fee? How is it different from earnest money?
Answer: Earnest money is an amount agreed on in your home-purchase contract that you pay soon after the contract is signed by all parties. It is typically about one percent of the agreed-upon price, although it can be more if you want your offer to stand out and be more attractive. The earnest money check should be made out to the escrow agent – usually the title company – which will deposit the check and hold the money in escrow until the transaction closes. It will then be credited toward the purchase price of the home. If the transaction does not close, the terms of the contract will determine who receives the earnest money. It’s typically returned to the buyer, though there are unpleasant exceptions.
The option fee, on the other hand, is a small amount of money, typically $100 to $1000 (depending on the price of the house), which gives the homebuyer the right to examine the house, arrange financing and generally decide yes or no about going forward with the purchase. The option fee typically buys about 10 days, during which time the seller may not sell to anyone else but the buyer can terminate the contract. The option fee check is made directly to the seller, who keeps the money whether the deal goes forward or not. If it does go forward, it will usually be applied to the purchase price at closing.