Uncovering the hidden enemies of home buying. Your Enemy: Underground Oil Tanks
I’ve learned a lot from the school of hard knocks in my real estate investing career. Just about the time you think you are getting the hang of things something pops up that you didn’t realize could have such large consequences. I was recently flipping a home and quickly learned that underground oil tanks can lead big problems and big expenses.
Enemy: Underground oil tanks
Why it’s an issue: Oil leaks creating environmental hazards
Likelihood of finding it: Likely in older homes pre-1980s
Cost to fix: Moderately expensive – Very expensive depending on level of contamination
Underground oil tanks are usually found on older homes. I have seen houses as new as the late 1980s with them but that is probably a rare occurrence. They are also only a problem if they have leaked. This means that if you do run across a newer home with an underground oil tank it most likely won’t be a concern because it hasn’t had time to rust out. The problem homes are the old houses that still have the original oil tanks. Steel oil tanks will always rust given enough time and eventually start to leak oil into the environment.
What to look for:
There are a few different methods you can use to spot an underground oil tank. If you are interested in an older home I recommend walking the perimeter of the home and looking for an oil tank fuel fill. The fuel fill looks like one or two old metal pipes sticking out of the ground. They are usually a couple inches tall and are dark in color. Pay close attention to the landscaping areas around the house and make sure they aren’t hiding behind a bush or flower. If you know the home is or was on an oil furnace and don’t see an above ground tank you may need to walk the property with a metal detector to be certain.
How to fix and costs of fixing:
I recently purchased a home with an underground oil tank and learned a few lessons from it. There is not necessarily a single fix for an underground oil tank but hopefully you’ll gain some insight from my experience. The house I purchased needed quite a bit of work. One day, while a contractor was working on it, they mentioned that there was an abandoned underground oil tank in the front yard. I’d been through real estate classes and knew that they could present a problem so I took note of it to make sure that I disclosed it to the buyer. I didn’t think much about it beyond that. After the work was completed, I found a buyer who was actually a savvy real estate professional. I gave them the Residential Property Disclosure [required in North Carolina] that detailed any material fact I was aware of. I disclosed that there was an abandoned oil tank and the buyer elected to have the oil tank inspected for leaks. I’m not sure if most buyers [or real estate agents for that matter] would have known the importance of testing an oil tank but because of this buyer’s background he was educated enough to have it inspected.
The buyer hired a licensed geologist for the inspection and I was called shortly after and told that the tank had leaked. The licensed geologist also told me that the likelihood of a tank that age leaking [the house was built in 1950] was very high. This is when the learning curve started.
When a licensed geologist finds an environmental hazard they are required to report it to the state. The state in turn slaps deed restrictions on the property. That means that any lawyer who is doing a title search on the property will find that there has been an environmental contamination on the property. The deed restrictions in North Carolina are:
That house can’t have an active well
The contamination site can’t be disturbed within so many feet.
At this point I was faced with a couple of options. You can, based on my understanding, do nothing and accept the deed restrictions. [To my knowledge this was not always true but North Carolina recently updated their laws]. In my case the “do nothing” approach wasn’t going to work. I had a ready, willing, and able buyer that was probably going to walk away if I did nothing. If the buyer walked, I would have then had to market the property while disclosing the deed restrictions and oil contamination. This may have affected my time on the market and the value of the home. The second thing you can do is to hire an environmental consulting firm to remove the old tank. If you only remove the tank you will still have environmental contamination and deed restrictions. The third option is to remove the tank and try to remove all of the contamination thus eliminating the deed restrictions. Option three is obviously the best; however, as an investor it’s risky. The problem is that it may be impossible to remove all of the contamination. For instance, the oil tank that I had was close to the foundation wall. You can only dig so close to the foundation before you damage the foundation. As an investor you will be paying money for someone to try to clean up oil. If they don’t succeed, you’ve just wasted a lot of money and still have the deed restrictions. I talked with the buyer and they agreed they would still proceed if I removed the tank.
The removal of my oil tank was $1,885. The environmental consultant charged me $400 which included writing a report that they submitted to the state. The silver lining was that during the removal process of the tank the removal company was able to dig up all of my contaminated soil. I paid an additional $464 an extra soil analysis performed so the state would ultimately not require deed restrictions. The buyer was satisfied with not having any deed restrictions so we ultimately closed. Between the time the contract was written and the house closed, an additional $2750 of profit disappeared over that oil tank. I chalked it up as another educational expense from the school of hard knocks.
The last thing you want to do is get the state to issue a No Further Action letter or NFA. Keep in mind the NFA letter doesn’t actually mean there is no more contamination on the property. It is just a letter from the state saying that it is currently satisfied with your efforts and is “closing the case” so to speak. It’s still an important letter, however, because it usually satisfies the buyer and lender. In the end, I was issued a NFA letter, I had no deed restrictions and the buyer closed on the home.
-Happy Home Buying!
Red Link Realty
About the Author:
Daniel Smith is the Owner/Broker-in Charge of Red Link Realty a Lexington, North Carolina based real estate firm. Daniel uses his real estate knowledge to help both prospective home buyers and sellers with their real estate transactions. Daniel has been investing in residential rental properties and house flipping since 2008.