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!
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Great Article! I've used Option fees when investing, but franlky, I haven't considered them for regualr buyers. I think this is a great Idea, especially in this market. thanks for the info.
So many people don't even have a firm grasp on the Alternative 2 contract. This post sheds some light on that and the option fee.
Well done Leesa!
Leesa
Thanks for sharing the information on option fees in North Carolina.
Good luck and success.
Lou Ludwig
Leesa - This is a terrific post! This clearly explains to home buyers and sellers how this option works. Now that I know how this works I would have likely used this option when I was buying my primary residence. Excellent job! I like this so much I am going to post it on my Raleigh Write Up Blog
We use option periods everyday and for almost every buyer here in Austin Texas. Typically a 7-10 day option period and give the seller $100-$200 for an unrestricted right to terminate the contract. Great post explaining how things work in your part of the country!
Leesa this explanation will certainly be helpful to buyers and sellers. It is always good to have options.
Thanks for explaining things so clearly, Leesa. I'm not sure if you've heard, but NC will be getting rid of Alternative 1 within the next year or so, so understanding the option fee and buyer's right to terminate during the option period will be even more important soon. I'm glad for the change - it will mean less dates to keep track of and hopefully less squabbling over the defination of necessary repairs, cost estimates, etc.
It just makes sense, Ray, to me! As the current NC Offer to Purchase and Contract stands it is very cumbersome.
Thanks, Craig! If more people understood the Alt 2 it would certainly be used more!
Hi Leesa,
Before today I had never heard of this. If I wouldn't have read the article I would have instantly booed it. Thanks for the lesson. Cindy
You're welcome, Lou!
Leesa,
Interesting concept, I think it really has it uses.
Thanks so much, Nevin - the post on your other blog is greatly appreciated! I do believe this is the way we are heading and I for one couldn't be happier!
I didn't recognize you Christopher! Great new picture! I wish we did have any other choice BUT the Option Fee - that's coming down the road though so if agents here don't start getting used to it is gonna be crazy when it rolls out!
It is good to have choices, Jennifer, but the rumor is that is going away. IMO - a GREAT THING! Just trying to get ever acclimated to the possible new coming down the line.
Raine - YES, YES, YES and I for one am ecstatic!!!!! I just don't understand the hesitation and push back that Option Fees have had in NC!
That has been the normal reaction of alot of people, Cindy. But if you break it down and really look at it it's pretty brilliant for all parties involved!
Well written, very good explanation of a confusing item on the contract here in NC.
Be sure to check out the second half of the series, Dan - it really is a great way to buy a home!
Thanks Penny! I know it is so hard at times to try and explain it so thought I would get it out there in a blog post!