Option Money

I am getting ready to do my first deal in Denver, CO, and was wondering if there are any rules regarding option money and if it needs to be stored in a certain type of checking account the way a security deposit does. What do other people do with option money, and do you commingle it with your personal funds?

I am also collecting a security deposit (in a judge’s mind, a landlord collects a security deposit, a seller does not), and plan on putting that in an appropriate account per the Colorado landlord/tenant regulations.


The option fee is non-refundable so in theory you could do what you want with it. I recommend keeping things separate though.

Also, you should never mix personal and business funds.

IS your option fee non-refundable? What does it say in your option agreement?

Check your state’s laws concerning option fees. In most cases, if the fee is nonrefundable, then it is your money when it’s received and there is no special way to manage it (like holding in a trust account). Again, you must check your state’s regulations to be sure.

As evergreen said, you don’t co-mingle personal and business funds. If you are going to start doing REI, then open up a separate checking account for that purpose. It does not have to be a business account, but it does have to be completely separate from your personal account. If you need spending money, you can “pay” yourself with a check from the business account.

Hope it helps,


Your option fee should be non-refundable because that is the way an “OPTION” works. The optionee is securing the right to purchase the asset at the set price by the specified time period according to the outlined terms. The optionee is paying in dollars or other consideration for this right. The optionee now controls said asset and it is removed from the market by the optionor.

Checking your state’s laws for the specifics is always good advice. Consult with a lawyer if the situation warrants.

Thank you for all of your help. It is greatly appreciated!

I have a client who has been using his renter’s lease option money for his monthly expenses.

When I had a lawyer look over his lease option documents, he had specified that the lease option down payment was refundable if the lease option contract was mutually cancelled.

This particular client had the lease option contract set up so that the client would put down $5,000 - $10,000 depending on the price of the house for the contract then a percentage of the rent would go toward the additional downpayment per month. So only 1 payment was made with a set amount going toward the downpayment.

One of his rent/option clients ran into financial trouble and had to move out... The rent was $2700 per month with a $5,000 "down payment".  We live in Sacramento.... Big trouble...  

My client may have to refund the $10,000 because of his contract with his and come up with an additional $2700 per month until we can get the house sold, refinanced or another lease option????.

That is just common sense. If you mutually cancel the option, you must refund the money.

This is a good reason to only take option money in the way it was intended, all up front. Also to keep it tucked away unless you have the cash flow to let it work.

One way to work that situation out might have been for the TB to sign a document agreeing to pay specific damages, like 2 months rent. Each damage item would have a specific price and be fully documented. The document specifies that the option will be mutually voided and the money due the TB will be the option fee paid less damages owed. You would want the TB to pay for the past rent owed and 30 days to give you time to find a new TB.

IMHO, too many people do LO’s wrong. The purpose should be to sell the property without a realtor, which saves money, and to get a strong price. Your option fee should be 1% low end to 5% high end. The idea is to actually sell the house, not to try and collect high option fees. In fact, you could accept a low option fee and make up for it by a higher lease and better options for you.

but what do I know :smiley: