Is the option fee refundable if the buyer terminates during the option period?

No. The option fee is consideration for the termination right and is non-refundable. The buyer keeps the termination right (and uses it); the seller keeps the option fee. The earnest money, by contrast, is fully refundable if the buyer terminates within the option period — and the buyer recovers that separately from the escrow agent.

Can the option period be longer than 10 days?

Yes. The option period is negotiated between the parties. Typical periods range from 5 to 14 days, but longer periods (30 days or more) appear in unusual transactions involving extensive due diligence. The option fee may scale with the period length, with longer options commanding larger fees, but the relationship is negotiated rather than statutory.

What happens if the buyer fails to deliver earnest money within three days?

Paragraph 5(D) gives the seller the right to terminate the contract. The seller is not obligated to terminate — the seller may grant the buyer extra time — but the right exists. Late earnest money is a frequent reason for early seller-side termination, particularly when the seller has competing offers.

If the buyer terminates under §5.008(f) for late disclosure delivery, what happens to the option fee?

The §5.008(f) termination right is statutory and operates regardless of the contract's option period. The contractual option fee is generally non-refundable under paragraph 5 even when the termination is grounded in a separate statutory right — though parties may negotiate option-fee return as part of the termination, and seller behavior that caused the late disclosure can affect the equities in negotiation.

Can the buyer extend the option period after it begins?

Only by mutual written agreement of the parties. The option period as initially set is the period the buyer paid for. Extending the period requires the seller's agreement, typically captured in a written amendment to the contract, and may involve additional consideration (an extended option fee).

Does the option period count business days or calendar days?

Calendar days by default — the option period runs from the effective date for the number of days specified, counting weekends and holidays. Parties can negotiate business-day computation if desired but the form's default is calendar days. The termination notice deadline under the TREC residential contract is 5:00 p.m. local time where the property is located on the last day of the option period — not midnight. A buyer in a 10-day option period must deliver notice by 5:00 p.m. local time on Day 10.

Texas Option Period and Earnest Money: How TREC Contracts Handle Termination Rights

TL;DR

Texas residential transactions run on the TREC One to Four Family Residential Contract (Resale), the most-used form in Texas residential real estate. The contract contains two distinct deposit mechanisms that buyers and licensees frequently confuse: the option fee, which buys an unrestricted termination right during the option period (current TREC residential contract paragraph 5), and the earnest money, which secures the buyer's performance and is also governed by paragraph 5. The option period creates a free-look window where the buyer can terminate for any reason or no reason at all by delivering timely notice — closer in substance to a true option contract than to a contingency. The interaction with the §5.008 seller's disclosure notice and its independent buyer-termination right for late delivery is one of the most-tested concepts on the Texas real estate exam.

The TREC One to Four Family Residential Contract

The Texas Real Estate Commission promulgates the standard contracts used in Texas residential transactions. The One to Four Family Residential Contract (Resale) is the dominant form, with related forms for new home construction (incomplete construction, completed construction), farm and ranch property, residential condominium, and unimproved property. TREC contract forms are mandatory for license holders representing parties in transactions of the type the form covers — under 22 TAC §537, license holders may not use unauthorized forms when a TREC-promulgated form exists.

TREC contracts are revised periodically by the TREC Broker-Lawyer Committee. Form revision numbers shift as the committee updates the standard form — a current version supersedes prior versions for new transactions, though transactions already underway typically use the version effective when the contract was executed. Licensees should verify they are using the current revision before contract preparation.

The termination option — paragraph 5

The current TREC residential contract paragraph 5 contains the termination option (older versions of the form had the termination option in paragraph 23). For a separately-stated option fee delivered to the escrow agent within three days of the effective date, the buyer obtains an unrestricted right to terminate the contract within a defined option period — typically 5 to 14 days from the effective date, negotiated between the parties. Termination during the option period requires only that the buyer deliver written notice within the period. No cause must be shown.

The option period substance is closer to a true option contract than to a contingency. A contingency permits termination for a defined reason (financing failure, inspection finding, title defect); an option permits termination for any reason. The buyer can terminate during the option period because inspections revealed defects, because the buyer changed his mind, because market conditions shifted, or because of any other consideration. The option period is the most powerful buyer-side mechanism in Texas residential contracts.

The option fee is generally non-refundable but credits against the purchase price at closing if the contract closes. The fee can be nominal ($100–$500 is typical) — the substantive purchase price is the same, the option fee just serves as consideration for the termination right. If the buyer terminates during the option period, the seller retains the option fee but must refund the earnest money — a critical distinction many buyers and some licensees miss.

Option fee vs earnest money — the crucial distinction

The two deposits do different work and follow different rules. The option fee is consideration for the termination right; the earnest money is a good-faith deposit securing the buyer's performance. The two are typically delivered together at contract execution but are treated separately:

Option fee — delivered to the escrow agent within three days of the effective date under paragraph 5A. Released to the seller and generally non-refundable on termination during the option period. Credits against purchase price at closing.
Earnest money — delivered to the third-party escrow agent (typically a title company) within three days of the effective date, also under paragraph 5A. Refundable on termination during the option period. Subject to forfeiture as liquidated damages on buyer default outside the option period.

The mechanical difference matters. A buyer who terminates during the option period loses the option fee (small) but recovers the earnest money (large). A buyer who defaults after the option period expires loses both — option fee gone, earnest money forfeit to the seller as liquidated damages.

Earnest money mechanics — paragraph 5

Paragraph 5 governs earnest money. The buyer must deposit earnest money with the agreed escrow agent — typically the title company — within three days after the effective date of the contract. Late delivery gives the seller the right to terminate the contract under paragraph 5(D). The escrow agent holds the deposit subject to the contract's release provisions.

Release of earnest money requires either contractual entitlement (e.g., timely buyer termination during the option period, or seller default) or written agreement between the parties. When the parties dispute entitlement — buyer claims good-faith inspection-based termination, seller claims buyer default — the escrow agent typically holds the funds until the dispute resolves through negotiation, mediation, or court order. The escrow agent holds funds under the contract and applicable escrow/title-company rules; if a broker holds the trust money, TREC trust-account rules under 22 TAC §535.2 also apply.

Interaction with §5.008 seller's disclosure

Texas Property Code §5.008 imposes the seller's disclosure notice requirement for residential resales — see our Texas seller's disclosure notice §5.008 guide for the full disclosure framework. The §5.008 buyer-termination right (seven days after late delivery, under §5.008(f)) runs independently of the contractual option period under paragraph 5. A buyer whose option period has expired may still have an independent §5.008 termination right if the seller delivered the disclosure notice late.

The two termination mechanisms can stack or interact. A buyer who terminates within the option period under paragraph 5 also recovers earnest money under paragraph 5(D); a buyer who terminates under §5.008(f) for late disclosure delivery has the same recovery. The buyer must affirmatively elect the termination right — the right is not self-executing — and must deliver written notice within the applicable period.

Inspections and the option period

Inspections are the practical purpose of most option periods. The buyer arranges a property inspection (general, foundation, pest, pool, etc.) during the option period, evaluates the results, and either proceeds with the contract, requests repairs or seller concessions, or terminates. Repair negotiations conducted during the option period are governed by paragraph 7 of the contract — the seller is not obligated to make repairs but the buyer has full termination leverage during the option period.

Most Texas residential transactions reach a negotiation point during the option period — the inspection identifies issues, the buyer requests repairs or credit, the seller responds, and the parties either agree or the buyer terminates. The option-period termination right gives the buyer powerful negotiation leverage that disappears the moment the option period expires.

Default and remedies — paragraph 15

Paragraph 15 governs default. If the buyer defaults after the option period expires, the seller may either retain the earnest money as liquidated damages or sue for specific performance. The election is mutually exclusive. If the seller defaults, the buyer may terminate the contract and recover the earnest money plus the option fee, or sue for specific performance.

The liquidated-damages framework is intentionally limited — the earnest money cap on damages encourages efficient resolution rather than protracted litigation. Sellers in markets that have moved against them since contract execution may have little practical interest in pursuing specific performance against a defaulting buyer; sellers in stagnant or appreciating markets may have stronger interest.

Frequently Asked Questions

Is the option fee refundable if the buyer terminates during the option period?: No. The option fee is consideration for the termination right and is non-refundable. The buyer keeps the termination right (and uses it); the seller keeps the option fee. The earnest money, by contrast, is fully refundable if the buyer terminates within the option period — and the buyer recovers that separately from the escrow agent.
Can the option period be longer than 10 days?: Yes. The option period is negotiated between the parties. Typical periods range from 5 to 14 days, but longer periods (30 days or more) appear in unusual transactions involving extensive due diligence. The option fee may scale with the period length, with longer options commanding larger fees, but the relationship is negotiated rather than statutory.
What happens if the buyer fails to deliver earnest money within three days?: Paragraph 5(D) gives the seller the right to terminate the contract. The seller is not obligated to terminate — the seller may grant the buyer extra time — but the right exists. Late earnest money is a frequent reason for early seller-side termination, particularly when the seller has competing offers.
If the buyer terminates under §5.008(f) for late disclosure delivery, what happens to the option fee?: The §5.008(f) termination right is statutory and operates regardless of the contract's option period. The contractual option fee is generally non-refundable under paragraph 5 even when the termination is grounded in a separate statutory right — though parties may negotiate option-fee return as part of the termination, and seller behavior that caused the late disclosure can affect the equities in negotiation.
Can the buyer extend the option period after it begins?: Only by mutual written agreement of the parties. The option period as initially set is the period the buyer paid for. Extending the period requires the seller's agreement, typically captured in a written amendment to the contract, and may involve additional consideration (an extended option fee).
Does the option period count business days or calendar days?: Calendar days by default — the option period runs from the effective date for the number of days specified, counting weekends and holidays. Parties can negotiate business-day computation if desired but the form's default is calendar days. The termination notice deadline under the TREC residential contract is 5:00 p.m. local time where the property is located on the last day of the option period — not midnight. A buyer in a 10-day option period must deliver notice by 5:00 p.m. local time on Day 10.

Bottom Line

The TREC One to Four Family Residential Contract gives buyers an option-period free-look window and earnest money mechanics both governed by paragraph 5 of the current form that frequently confuse parties. The option fee buys an unrestricted termination right and is non-refundable; the earnest money secures buyer performance and is refundable on timely option-period termination. The option period interacts with — but does not replace — the independent §5.008 buyer-termination right for late seller's disclosure delivery. For the broker-side trust-fund mechanics governing earnest money custody, see our Texas broker supervision and trust-fund rules guide. For the full exam blueprint and the other Texas-specific topics you'll need to know, see our Texas real estate exam complete guide.

Source: Tex. Prop. Code §5.008 — Seller's Disclosure of Property Condition · TREC Contract Forms · 22 TAC Ch. 537 — Standard Contract Forms