Options

As a real estate investor assesses potential properties to acquire, when a good investment has been identified, what if an extended closing is preferred? In this case, an investor might use an option contract.

The option contract enables the investor – with an option contract, the investor becomes the optionee – to lock in purchase terms with the seller. The seller is the optionor. Negotiated terms in an option contract involve the sale price as well as a timeframe in which the closing will take place. 

Terms for the purchase are presented by the optionee to the optionor, accompanied by a dollar amount – consideration.

In order for the option contract to be effectuated, consideration is given by the optionee to the optionor. Consideration is comparable to an earnest money deposit, which accompanies a real estate contract of sale in a traditional purchase.

Once the option contract is in place, the optionee has secured his or her option to purchase the home. According to terms set forth in the option contract.

The optionor can’t sell the property to another buyer. The optionor can’t enter into another option agreement with another optionee. While the optionee is not obligated to follow through and complete the purchase of the home. The optionee has an option.

Within the option period, the optionee lines up his or her financing. The optionee obtains cost estimates to renovate the home. The optionee coordinates the appraisal and inspections.

As per inspections, the optionee may want to order a tank sweep. 

A tank sweep will show the optionee whether there is an underground storage tank – a UST.

An OPRA request can be forwarded by the optionee to the township. An OPRA request could enable the optionee to obtain public records pertaining to the home.

Environmental concerns…

Let’s say a UST has been discovered. The Environmental Protection Agency does not necesssrily regulate underground tanks for residential homes. 

By definition, a UST is a tank whereby a minimum of 10% of the piping is located underground. For UST’s with storage capacity of less than 110 gallons, these fall outside federal oversight. Although states and municipalities often institute their own policies for UST’s. 

Storage tanks installed in the 1980’s – and prior to the 1980’s – were constructed with steel. Over time steel corrodes. If corrosion occurs with a steel UST, oil could leak. With an oil leak, you run the possibility of contaminating not only the subject property, but the surrounding area as well. Oil could seep into soil. And water sources too. These represent environmental hazards.

Within the due diligence phase of an option contract, as home inspections are conducted, in the event that a UST has been discovered by way of a tank sweep or an OPRA request, the option continues. While the execution of the option could be put on hold. 

Let’s assume local home values increase during the option period. While discovery of the UST negatively affects the home’s value.

One “plus” – increasing home values – and one “minus” – the UST.

When the optionee obtains financing, the home becomes the lender’s collateral. The UST will lower the market value of the home. Adversely affecting the lender’s collateral. 

The UST affects marketability. The UST culminates in a lower appraisal value. The reduced appraisal value affects loan to value. Which, in effect, affects loan terms. 

The optionee’s lender may want to get a Phase 1 Site Assessment. A Phase 1 details environmental conditions. The lender would likely schedule a Phase I prior to issuing the loan commitment.

Discoveries arrived at by the optionee during the due diligence phase through inspections – such as a discovery of a UST – could determine whether the optionee elects to follow through on the option they have to purchase the home.