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One of the most important aspects of purchasing real estate is that of making sure you know what you are getting into. Getting a property under contract is just the first step. Usually there is financing involved and your lender has a lot of requirements that have to be satisfied before he will absolutely approve you for your loan. That’s just part of it. Usually, when you get a property under contract, you have simply judged the book by its cover; you haven’t really read the book yet. For several years now, there has been a way to look into the book before you go forward with the purchase. Real estate transactions often have what are called purchase options. Whenever you have an option in a contract, it essentially means you have purchased the right to terminate the contract. For example there is a “Lease With Option to buy.” Under that scenario the buyer has the right to lease the property and he has paid the seller an option fee that applies to the purchase price if he goes forward with the purchase on a pre-determined date. However, if he elects not to consummate the sale, the seller keeps the option money.  Leases with an option to purchase can have purchase options worth several thousands of dollars.

Now, let’s talk about what is called a “Termination Option.” Nowadays, when a buyer gets a property under contract, he will pay the seller a nominal (insignificant) amount of money to have the right to terminate the contract for any reason or no reason whatsoever, for a number of days the buyer and seller agree to. That number of days usually ranges between 10 to 30 days. A nominal sum can be anywhere from ten to one hundred dollars. Both the number of days and the amount of money have to be agreed to by both buyer and seller. The essential purpose of the termination option period is to give the buyer time to thoroughly scrutinize the property – such as performing a whole-house inspection. A buyer could even terminate the contract on a whim and the seller would keep the option fee but the buyer would get his earnest money back. Earnest money can range form several hundred to several thousand dollars. Bear in mind, also, that when a buyer enters into a contract to purchase the property, he typically agrees to buy it in its current “as is” condition.

Let’s say I have entered into a contract to buy a house and I hire a state-licensed inspector to inspect the house. As the inspector goes about inspecting the property he finally gets a chance to check out the central heat and air. His inspection reveals that the system does not properly function and that it probably needs to be replaced. With this information in hand I instruct my agent to tell the seller’s agent that I want the seller to either install a new system or lower the price of the property so that I can afford a new HVAC unit. The seller may say “No, you agreed to buy the property in its “as is” condition and I am not going to make any concessions.” What’s my response going to be? “Yes, I agreed to buy the property in its “as is” condition, but I am also terminating the contract under the terms of the termination option that I paid for. Seller keeps the $75.00 option fee I paid and I get my $1,000.00 of earnest money back.

If this is what the seller decided to do, he probably made a big mistake. Why? Because he now has to disclose to any prospective buyer the fact that the HVAC is defective. If he does not he is in violation of the Deceptive Trade Practices Act, which can amount to treble damages when the seller knew or should have known about the problem.

Whenever you get a property under contract be sure to pay a termination option fee for your best protection. If the seller is not agreeable to the termination option, that should raise a red flag and you should walk away from the deal.

Mike McEwen is a real estate broker with 32 years in the business.

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