National Real Estate Exam (PSI)ContractsHard
A buyer pays a seller $5,000 in option consideration for a 6-month option to purchase a property for $250,000, with the option money to be credited toward the purchase price if exercised. If the buyer exercises the option on time, how much additional money must the buyer pay at closing to complete the purchase?
- A$245,000, since the $5,000 option consideration is credited toward the price
- B$250,000, since the option money is separate and non-refundable
- C$255,000, since the option fee is added on top of the purchase price
- D$0, since the option consideration covers the entire purchase price
Show answer & explanationAnswer & explanation
Correct answer: A. $245,000, since the $5,000 option consideration is credited toward the price
Since the option agreement states the $5,000 option consideration will be credited toward the purchase price if exercised, the buyer only needs to pay the remaining balance: $250,000 − $5,000 = $245,000 at closing.
Why the other options are wrong
- B. This ignores the crediting term explicitly stated in the option agreement.
- C. The option fee is credited, not added, per the stated terms.
- D. $5,000 is far less than the full $250,000 purchase price.
Option Consideration Application
Money paid by an optionee to hold an option open, which may or may not be credited toward the purchase price if the option is exercised, per the agreement's terms.
- Option consideration is required for a valid option
- If exercised, agreement may credit the fee to purchase price
- If not exercised, the option holder typically forfeits the fee
- Terms of crediting must be clearly stated in the contract
Memory trick: Credit means 'take it off the top' of the final bill