What does the option fee actually buy me if I never exercise

Yes, that's right. The fee buys you the right to decide later at a price fixed now. If you don't decide yes, you bought time and a price guarantee and you consumed both. Nothing comes back unless the contract says it does, and non-refundable means the contract says it doesn't.

On size, I've seen option fees run anywhere from about 1% to 5% of price, and $8,000 on $289k is roughly 2.8%, so nobody is testing you. What I'd look at instead is the strike. $296k in 18 months on an asking price of $289k that has already been sitting is a 2.4% total move, which sounds mild until you ask whether $289k is actually the value or just the ask. If it appraises at $272k today, your option is a right to overpay and the $8,000 is buying you nothing worth having. Get your own read on value before you argue about anything else.

Two mechanical things. Ask for the option to be a separate document from the lease, not a paragraph inside it. And ask whether a memorandum of option can be recorded where the property is, because that varies by state and it's the thing that stops the owner from selling out from under you. A local real estate attorney should look at the draft, which on an $8,000 non-refundable check is money well spent.