The Option Contract

An owner-occupying home buyer - or a real estate investor - looks to acquire a good, clean property. A property which can be financed by the purchaser. When assessing potential properties to acquire, due diligence for owner-occupying buyers and for investors is a wise undertaking, especially when the closing date for the property could extended to a future date. I.e.: an extended closing.

An extended closing occurs when the acquisition of the property is not the immediate objective of the buyer. In this instance, the buyer could consider utilizing an option contract to "tie up” the property at the determined sale price, for an established period of time.

The option contract creates an opportunity for the buyer to acquire the property from the seller at an agreed-to sale price, accompanied by agreed-to sale terms, within a set period of time. This is offered to the buyer in exchange for a specific amount of money. The sale price the buyer locks into is negotiated within the option contract. Once the option contract is in place, the buyer has the exclusive right to acquire the property within the timeframe agreed to through the option.

In an option contract, while the seller is not permitted to sell the property to other prospective buyers, the buyer is not obligated to purchase the property. Within the period of time established by way of the option, the buyer will line up financing, assemble estimates to update the home, and schedule an appraisal, and a home inspection.

Speaking to a home inspection, the buyer in an option contract will conduct inspections, adn this could include a tank sweep. A tank sweep lets the buyer know whether there is an underground storage tank (“UST”)on the property the buyer. An Open Public Records Act (“OPRA”) request can also be submitted by the buyer to the township so as to determine whether there may be a UST. The OPRA request enables the buyer to review public records for the property.

The Environmental Protection Agency (“EPA”) does not in most cases regulate underground oil tanks for residential homes, and a UST is an underground tank where at least 10% of the piping is located underground. If UST storage capacity consists of less than 110 gallons, the UST for residential properties falls outside of federal oversight altogether.

While federal oversight of UST’s does not consist of a nationwide standard, states and municipalities can enact local policies regarding UST’s. A municipality may elect to do so because storage tanks built prior to the ‘80’s were regularly constructed with steel. Over time steel can corrode. If corrosion of an older steel UST occurs, oil that had been stored in the UST could could leak. An oil leak from a steel UST could contaminate the surrounding soil, and, potentially, it could contaminate water sources too. This could be an environmental hazard.?

Within the due diligence phase of an option contract, as home inspections are conducted, in the event a UST is discovered by way of a tank sweep (or an OPRA request), the option contract essentially permits the buyer/investor to still put the property “on hold” for the specific period of time. If area real estate values have increased during the timeframe established within the option contract, defects to the subject property could negatively affect the property value. A “plus” - area property values have increased, and “minus” - defects to the property - which affect the value of the property.

When obtaining a home loan used to finance a property, the home becomes collateral for the lender. In our example, the UST could alter the value of the home for the buyer, while affecting lender collateral. The UST alters the marketability of the home. A reduced property value is important in relation to the loan to value (“LTV”) used by the lender for the buyer's financing.

If a UST is discovered, the lender may opt to schedule a Phase 1 Site Assessment. A Phase 1 is a detailed report which speaks to environmental conditions of the subject property. The lender may elect to schedule a Phase I prior to issuing a loan commitment.

In order for an option contract to be in place, consideration - i.e.: money - is often paid by the buyer to the seller. Consideration becomes kind of like an earnest money deposit which can be applied towards the purchase price.