What is the purpose of the option fee in a real estate transaction?

The purpose of the option fee in a real estate transaction is primarily to secure the buyer's right to purchase the property during the option period. When a buyer pays an option fee, they obtain the exclusive right to purchase the property within a specified timeframe, known as the option period. This method provides the buyer with some assurance that the seller will not sell the property to someone else during this time, thus giving the buyer the opportunity to perform due diligence, secure financing, or decide whether to proceed with the purchase.

While the option fee may also have implications for the closing costs or serve as compensation to the seller for taking the property off the market, its principal function is to grant the buyer the option to buy, ensuring that the buyer has the ability to make a decision without the pressure of competing offers. This feature of real estate transactions is particularly vital in competitive markets where properties can receive multiple offers quickly.