If you've spent any time buying commercial real estate (CRE), you've probably come across earnest money or soft deposits. It's a standard part of most purchase agreements and often one of the first major financial commitments a buyer makes. 

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But you might be shocked if a seller mentions requesting an option fee or option money. 

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Though they are popular in certain markets, especially in Texas, many CRE investors don’t understand how they work or even how they differ from earnest money, which they are more familiar with. 

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Yet the distinction between option fee and earnest money matters: while earnest money deposits are a routine feature of CRE acquisitions, option fees are used more selectively, often in development projects or transactions that require additional flexibility before a purchase is finalized. Understanding when each applies can help you structure deals more effectively, negotiate with confidence, and avoid costly surprises.

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In this guide, we will clarify option fee vs earnest money, explain how both are used, and when you may need to use both for the same real estate transaction. 

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We’ll cover: 

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1. What is an option fee in real estate? 
2. A brief overview of earnest money in real estate
3. Option fee vs earnest money: Differences in operation
4. Option fee vs earnest money: How to navigate the option fee in real estate

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Do you want to consistently secure earnest money deposits for all your CRE deals? Contact us today to learn how our EMD financing product can solve your earnest money worries.

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1. What is an option fee in real estate? 

An option fee in real estate is a small, non-refundable payment that real estate buyers make to real estate sellers for the latter to temporarily take the property off the market while the buyer decides whether to proceed. 

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From another perspective, the option fee gives the real estate buyer the right but not the obligation to purchase a property within the specified option period. Within this option period, the buyer has the right to cancel the transaction or proceed with it.

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Said simply, the option fee is the cost of an option contract. As option buyers, real estate buyers compensate the real estate sellers (option sellers or writers) for giving them the right but not the obligation to purchase the property within the option period. 

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Why do buyers require an option period in real estate? 

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Simply put, it gives them a leeway to conduct thorough inspections, appraisals, and due diligence (lender checks, HOA documents review, repair estimates and negotiations, among others) without losing the property to another buyer. In other words, buyers can take the time to decide if they want to purchase the property without the risk of losing it to a competitor. 

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In this sense, real estate option contracts work similarly to stock options, except that price is not the main factor real estate option buyers consider when deciding whether to exercise the option contract.

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How popular is the option fee in real estate?

The option fee is especially popular in the Texas real estate market. 

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Though it is not a legal requirement, it is common for buyers to request an option period and for sellers to collect an option fee for giving buyers the right to back out of the deal.

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The option period in Texas is usually within three to ten calendar (not business) days, and the option fee ranges from $100 to $500 (especially for single-family homes), though it can be higher for more competitive properties, according to Levi Rodgers Realty, a Texas real estate group.  

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When you don’t intend to go on with the deal, you will need to send a written termination notice to the seller on or before 5 pm local time on the last day of the option period. If you fail to do this within the inspection window, it will be assumed you have chosen to continue with the deal, at which point a refusal to pay for the property will be a breach of contract. 

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Also, it is important to note that even in Texas, where option fees are normative, they are more popular in residential markets (it is even included as an item in the well-known TREC (Texas Real Estate Commission) residential contract form) than in commercial markets. 

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You are more likely to see them in CRE for land development projects, property assemblages, build-to-suit or redevelopment projects, and large development projects that require time to finalize project plans. Where they apply, they are often bigger amounts compared to residential properties. 

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Outside of Texas, option fees and option periods are less popular, with both buyers and sellers relying on earnest money to protect their interests. 

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However, the due diligence fee used in North and South Carolina markets serves the same function as the option fee, according to Jerry O’Reilly, a real estate investor at Cash Home Buyers Crew, a real estate investment firm. 

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In fact, structures seeking to achieve the same goal as the option fee are ‘common throughout the country,’ according to Chad Phillis, founder of Checkmate Rentals, an Airbnb property management firm. 

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2. A brief overview of earnest money in real estate

An earnest money deposit in real estate is an amount that you put down as a buyer to show a serious commitment to purchasing a property. 

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Also known as a good faith deposit, it is usually a certain percentage of the purchase price, and how much you are expected to pay depends on the state where you operate. But you can expect an amount between 1-10% of the purchase price.  

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Earnest money is usually an important part of the purchase and sale agreement (also known as the purchase contract). This contract will state how much will be paid, the escrow agent that will receive the earnest money, valid contingencies under which you can pull out of the deal, the due diligence period, and the delivery deadline, among other details. 

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Since the earnest money is an important precondition for the fulfilment of the contract, it must be paid for the seller to remain obligated to carry out their side of the deal. 

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What happens if you don’t deposit the earnest money?

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If the payment of earnest money is included as a key requirement in the purchase contract, then you are in breach of the contract, and the seller can cancel the contract, relist the property, and sue you for damages.  

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3. Option fee vs earnest money: Differences in operation

Now that we have explained what these two are, let’s clarify further by looking at the differences between earnest money and an option fee.

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Purpose

An option fee is paid to compensate the seller for taking the property off the market during the option period and giving you, the buyer, the right to purchase the property or cancel the deal.

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On the other hand, earnest money is a portion of the purchase price that you deposit with an escrow as a show of your commitment to complete the deal. 

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Recipient

The seller receives the option fee as compensation for taking the property off the market (and saying no to other plausible, and potentially better, deals) for a given window. 

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On the other hand, the earnest money deposit is held in escrow since it is not compensation or payment to the seller. Rather, it is a show of financial commitment to completing the deal. 

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Timing

Option fees are typically paid when a buyer secures the exclusive right to purchase a property, while earnest money is deposited after a purchase agreement has been executed. 

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In transactions that include both, the option fee often comes first, although in some markets, both payments are made shortly after the contract effective date.

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However, though they can both be paid at the same time, they should not be confused with each other. 

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“Both payments happen at the beginning of the sale, but they have different allocations of risk to them; they should not be considered interchangeable,” according to Austin Rulfs, founder of Zanda Wealth, a mortgage brokerage firm. 

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Amount

We saw above that the option fee is usually a fixed amount that ranges from $100 to $500 in typical markets and more in competitive markets. However, it can sometimes be structured as a percentage of the purchase price in commercial transactions, according to O’Reilly. 

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In contrast, the earnest money deposit is usually a percentage of the purchase price, and typically between 1 and 10%, though it can extend to 15% in certain competitive markets. There are also some markets (like Iowa, South Dakota, and Maryland) where earnest money can be a fixed sum rather than a percentage. 

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Popularity

Option fees are normative in states like Texas, while earnest money deposits are standard in all US markets. 

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However, we should restate that structures like option fees exist in other states under different names (like due diligence money). 

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Usage

Option fees are more popular in residential markets and are only sparingly used in CRE. 

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In contrast, earnest money deposits are popular in both residential and commercial real estate, even though there are differences in how they operate in both markets. 

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Refundability

The option money is a non-refundable fee, irrespective of whether the deal goes through or not. On the other hand, earnest money can be refundable or non-refundable. 

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In residential real estate, earnest money is refundable if you opt out of the deal for any of the pre-agreed contract contingencies. The most popular are home inspection contingency, financing contingency, appraisal contingency, home sale contingency, title contingency, and insurance contingency, among others. 

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Refundability works a little bit differently in CRE. Here, there is a long due diligence period during which you can opt out of the deal for any reason. If you do opt out of the deal during this period, the earnest money will be refunded to you by the escrow holder.      

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Application

The application of the option fee depends on what you agree with the seller, as contained in the purchase contract. 

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Typically, when you decide to proceed with the deal, there is an option for you to credit the option fee to the property’s purchase price. 

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“Normally, if the buyer wants to continue with the deal, the option fee would be credited toward the purchase price at closing, so it's not an additional cost,” according to Phillis. “If the buyer walks, the fee is retained by the seller as liquidated damages - the seller gets paid for the inconvenience of having the property removed from the market.”

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Usage of the earnest money deposit also depends on the purchase contract. However, there are usually two choices for applying it: to finance a part of the closing costs or the down payment (in the case of debt financing).  

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4. Option fee vs earnest money: How to navigate the option fee in real estate

The first thing to say is that option fees are not required in most US markets. 

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One reason for this is that what option fees provide – a period where you can conduct due diligence while the property stays off market – can be negotiated into the purchase contract without the payment of any other fee aside from earnest money. 

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“Earnest money is an amount of money paid toward the purchase of a home, which demonstrates the buyer's good-faith intent to complete the transaction,” according to Wells Fargo. “This allows the seller to take the home off the market and stop considering other offers.”

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This is exactly how it works in Washington DC, according to Devin Henry, the President of Nomadic Real Estate. “Here in DC, we barely use option fees,” he said. “Earnest money does most of that work in our contracts, which is part of why this distinction surprises people who hear about it from Texas.”

However, it should not be assumed that the payment of earnest money automatically confers this benefit. Rather, you, or your real estate agent, should carefully negotiate the terms of the purchase agreement to ensure there is a clause requiring the seller to take the property off the market. 

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The point here is that sellers in most markets will do this without the payment of an option fee. 

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Nevertheless, there are certain markets where an option fee must be paid for such exclusivity. If you operate in such markets, you need to focus on maximizing the benefit you get from the option period while ensuring you can keep building a profitable portfolio. 

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Below are certain tips that can help you: 

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• Negotiate the option period and fee: While the option fee is normative in certain markets, there is no legal requirement regarding the option period and fee. This means there is room to negotiate better terms. 

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Furthermore, sellers will often allow you to negotiate a compromise between the option period and fee – shorter period for a lower fee or a longer period for a higher fee. Take advantage of this flexibility when either becomes the priority. 

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• Propose higher amounts in sellers’ markets: Interestingly, just as with earnest money deposit, proposing a higher option fee can be a competitive advantage. If you are in a market where many buyers are seeking to lock a property in, you can consider paying a premium if the numbers check out. 

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• Seek to waive the option fee in buyers’ markets: On the other hand, if you ever find yourself in a buyers’ market, try to get the option period while waiving the option fee. 

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In other words, monitor the market before you decide to pay an extra fee. Remember, there is still earnest money and closing costs to pay.  

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Finally, it is worth clarifying that in markets where option fees are paid, they are not a replacement for earnest money. 

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As we have seen, they serve different purposes. 

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If the option agreement is structured as a stand-alone deal, then refusal to pay means that you can’t enjoy any exclusivity even if the seller still goes ahead to sign a purchase contract with you. 

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On the other hand, if the option fee is added as a precondition (compulsory requirement) in the purchase contract, then a breach of contract may have been adjudged to have taken place, irrespective of payment of earnest money.  

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Similarly, if the payment of earnest money is a compulsory requirement, then nonpayment or delayed payment will result in a breach of contract, even if you have paid the option fee. 

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As noted above, such a breach of contract can lead the seller to cancel the deal, relist the property, and sue for damages. Add the reputation damage that follows, and you can see why this can become easily disastrous. 

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This is why you should avoid missing an earnest money deposit payment because of temporary illiquidity. 

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With a specialized earnest money financing company like Duckfund, you can secure earnest money deposits for multiple simultaneous CRE deals. Whether you are illiquid or plan to use your cash for other purposes, we will stand in the gap and send the required deposit to the relevant escrow agent (a real estate agent, a title company, or a real estate attorney).  

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You can complete an application in two minutes without submitting a credit report. Also, we make funds available to the escrow account within 48 hours, and you can secure funding for multiple deals at the same time (no need to choose between numerous potentially profitable deals. 

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Also, we support your negotiation in competitive markets by allowing you to propose a higher earnest money deposit to gain an advantage. With a financing partner like Duckfund, you don’t ever have to be in danger of a breach of contract because of earnest money. 

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Are you ready to build a profitable CRE portfolio unhindered by earnest money deposit demands? Sign up now with Duckfund for accessible and quick earnest money deposit financing solutions. 

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Takeaways

• Option fees and earnest money are not the same. Option fees buy exclusivity, while earnest money demonstrates a buyer's commitment to complete the purchase.
• Earnest money is standard in residential and commercial real estate across the US, while option fees are primarily used in Texas residential transactions and select CRE deals.
• Both payments carry different risks. Option fees are generally non-refundable, while earnest money may be refundable if contractual contingencies are met or buyers pull out of the deal during the due diligence period.
• Missing an earnest money deadline can lead to a breach of contract, making financing solutions an important tool for active CRE investors.

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Frequently Asked Questions

1. Is an option fee the same as earnest money in Texas?

No. An option fee is a payment made to the seller, which results in them taking the property off the market within the option period.  On the other hand, an earnest money deposit is a portion of the purchase price held in escrow as a show of commitment to finalize the deal.

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2. What happens to the option fee if you back out?

The option fee remains with the seller; it is non-refundable. 

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3. How long is a typical option period in commercial real estate?

The option period in Texas usually lasts between 3 and 10 days. 

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4. What happens to the option fee money?

If the deal succeeds, it is credited towards the purchase price; if it doesn’t, the seller keeps it. 

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5. Do earnest money and option fees go towards closing costs?

No. Earnest money usually goes towards closing costs or down payment, while option fees usually go towards the purchase price.