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  • Writer's pictureTaleen Krug

What Does Active Option Contract Mean?

Updated: Apr 3, 2023

option contract

Real estate can be a challenging subject for both buyers and sellers. For example, an active option contract is commonly employed in many states such as New York.

What sets active options contracts apart from other types of home contracts? To answer this question, read on for a comprehensive guide to active options contracts.

Learning About Active Option Contracts

An existing agreement contract implies the vendor has taken on an agreement to dispose of their asset. Nonetheless, the trade is in an option time frame or observation period. This is when a house review will continue. The purchaser may release from the acquisition of the dwelling.

During this stage of the buying process, the buyer initiates an inspection and has a period to assess the condition of the home. In certain states, this is referred to as having contingency status or a due diligence period.

An earnest money deposit is required when the buyer's offer is accepted by the seller; typically this amount is 1%-2% of the purchase price of the house for sale.

In certain jurisdictions, buyers must also pay an option fee in addition to the required earnest money deposit. The option fee is non-refundable if the current buyer decides to opt out of the transaction, regardless of reason, and is typically applied toward the final purchase price of the house that is for sale.

The Active Option Contract Process

Individuals looking to acquire a house that is advertised will arrange to observe house-buying. In the drawn-out house buying cycle, the buyer may become enamored with the residence and, with the realtor's assistance, determine to tender an offer directly. The seller gives their consent, placing the home Under Contract. That point has a span of time where they can legally withdraw from the acquisition agreement for any cause.

A down payment referred to as earnest money is paid by the buyer to the seller. This secures the house for them, preventing the seller from accepting offers from different possible purchasers when they have the earnest money. The earnest money typically ranges from 1% to 2% of the home's buying price. If the sale takes place, the earnest money contributes to the purchase cost of the house.

The selling of a home does not solely fall within the scope of the option duration, but also during the examination period. While in this phase and part of the complicated home buying process, the customer gets their quarters appraised by a professional inspector and reviews its components. In certain states, having an ongoing option agreement is necessary to carry out the residence assessment. Generally speaking, this option stretch persists between five and 10 days.

A third party such as a certified home inspector typically carries out a home inspection, their goal being to provide the current buyer with a thorough report on the property's condition.

If the inspection reveals issues like structural damage, plumbing issues, or difficulties with the HVAC, plumbing, and electrical components, it could be detrimental to the sale. In this case, if the seller is not willing to repair the problem, the buyer may decide to cancel the transaction and receive a refund of their earnest money.

Placing an Offer on a Current Option Contract

Imagine that you locate a property for sale, and it fits in with your financial situation, only to merely discover that it is already on a running option agreement. Is it still possible to bring forward an offer? In short, yes, you can make an offer on a house that is already occupied. You may still have the opportunity of acquiring the residence, yet regretfully it is a wait-and-see predicament. It hinges entirely on whether the prospective buyers choose to move ahead with the purchase or scrap the active option contract.

The good news is that the house is still for sale, as it is under an Agreement of Sale. If a former offer doesn't push through, you may have the chance to purchase the home - in fact, you could be the next potential buyer taken into consideration.

Active Contingent Contract vs. Active Option Contract

These two expressions are analogous. The disparity between them is fundamentally timing. For an Active Contingent Treaty, the customer has already gazed at the home and submitted a proposal. Although, there are matters—or contingencies—which must be decided upon before the purchase can be accomplished.

Common contingencies may include obtaining a home inspection report, allowing buyers to list and sell their current home, and receiving mortgage approval.

Once the contingencies have been resolved, the house can be sold and its status will change from Contingent to Pending, ready for its closing date.

Once a property is pending, it is not available to any other buyers until the deal falls through or isn't completed. It's important to acknowledge that not all pending real estate transactions will reach their conclusion; there may be unforeseen problems that arise before closing.

Active Contingent and Active Option Contracts

Acting Contingent Contracts and Contingent Offers are two sides of the same coin. For an Active Contingent Contract to be completed, the purchaser must have viewed the house, put forward an offer, and satisfied all conditions; however, the timing for this process varies.

The most typical contingencies are failure to pass inspection, the purchaser's existing home sale, and obtaining a mortgage loan.

Once the contingency is addressed, the sale of the home can continue, resulting in a status change from Contingent to Sale Pending and the house awaits closing.

Once a property is marked as pending, it's unavailable to other buyers unless the transaction fails before reaching closing. It's important to note that not all pending deals will reach closing; issues can still prevent the successful completion of the agreement through a real estate market expert,

AOCs Failing and How Often Does this Occur

Active signed agreements hardly ever fail to result in a successful closing, making up more than 95% of properties bought and sold. But when these deals don't happen, what are the underlying causes? These comprise of:

If home inspection issues are discovered through the inspection process, the buyer may choose to back out of the contract. On the other hand, they can request that the seller address the underlying problems or lower the selling price before voiding their agreement.

One of the primary reasons a home purchase might fall through is due to financial issues; for instance, the buyer's financial circumstances could have changed or their lender refused their loan because of an excessive debt-to-income ratio.

It's quite normal for purchasers to experience buyer's remorse--often especially among first-time home buyers--when facing one of the largest financial commitments of their lives.

To Sum Up

Navigating the complicated real estate process can be intimidating since the financial decisions and purchase decisions can be frustrating. That's why a good Realtor with experience can help you understand all the terms in any type of contract, making your home buying or selling experience easier.

If you're looking to relocate to New York, be sure to hire professional Realtors like Taleene and Ritchie Krug Jr. who can find you exactly what you're looking for in terms of the best home, house, condo, or townhome. Lifelong residents of Long Island, are part of a team with more than 40 years of combined Real Estate experience. They have a deep understanding of how Real Estate has evolved through the years which results in a team with unique dynamics and expert negotiating skills being put to work on your behalf. With 20 Offices Spanning Brooklyn Queens & Long Island, nobody is better equipped to handle your real estate needs.

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