It’s not unusual to see an excited property buyer jump onto a seemingly irresistible deal, only to realise later on that it was a grave mistake.
As a first home buyer, conducting due diligence and thoroughly analysing the deal ensures that you make a wise investment.
Whether you’re buying a residential property or an apartment building, this guide will help you understand everything you need to know about property due diligence.
What is Due Diligence in Real Estate?
In real estate, Due Diligence is the process of conducting a comprehensive analysis of the property’s physical and financial aspects to minimise risk to the buyer.
In essence, it’s the responsibility of the purchaser to “do their homework” on the property before entering into the contract.
Why is Due Diligence so important when purchasing a property?
The importance of conducting due diligence can never be overstated. Failing to conduct proper due diligence can lead to you unknowingly purchasing a property plagued with structural issues or pest infestations. By knowing this information, you can either back out of the sale or use it for negotiations.
The stakes are even higher when you’re purchasing your property via auction since there is no cooling-off period. If you’ve won the property at an auction, and then you discover some issues leading up to settlement and you no longer want to go ahead with the purchase, in this case, you will lose the 10% deposit. Or worse, paying the full purchase price on a property that is not up to your standard.
Beware of Special Conditions
While conducting your due diligence, you should also be aware of and pay attention to any special conditions that are in the contract.
In many contracts we’ve reviewed, you’ll find a clause stating that the buyer agrees to enter into the contract as a result of their own investigation, and has not relied on any representation made by the vendor, agent, or vendor solicitors.
For example, if the agent says that the property has 4 rooms and you find out after signing the contract that the house has 3 rooms, you’ve got no recourse to get out of the contract between you and the seller.
[.callout]💡 Don’t trust your agent blindly. Legally, the contract is between the buyer and the seller. If the agent made you believe in something that isn’t true, you can’t sue the seller but your recourse may only be limited against the agent. [.callout]
How to do due diligence as a property buyer?
Now that we’ve understood the basics and seen why you should take property due diligence seriously, how do you actually conduct one?
Here’s a property due diligence check list you can follow:
- Get your contract reviewed by a property lawyer
- Get building & pests inspection report
- Obtain Strata reports of strata apartments
- Obtain survey reports
- Get building certificates from the council
- Enquire with RMS, Jemena Works, or other government body authorities
As a bare minimum, you should always get your building & pest reports for residential properties and a strata report for apartments.
Get Your Contract Reviewed by a Property Lawyer
Property contracts often include complex legal terms that the ordinary property buyer isn’t familiar with.
With so much money involved, it’s only wise that you get a property lawyer to go through the contract to pinpoint any issues or what you’re liable for. In fact, this is the most important aspect of property due diligence.
A property lawyer will thoroughly analyse & review the sales contract and highlight any issues that may need further investigation.
Your property lawyer will help you:
- Explain any anomalies or caveats placed in the agreement
- Uncover any sewer lines by looking at the property plan
- Conduct title searches to spot any property restrictions in the form of easements and covenants
- Find any mortgages held on the property by third parties
- Find any registered leases on the property
- Evaluate the property’s zoning certificate
- Analyze the cooling-off statement if provided
The property contract of sale has some crucial information that will help you determine whether there are any deal breakers.
Get Building & Pest Inspections Report
A building and pest inspection report helps you evaluate the structural and overall condition of the property, and allows you to avoid any costly surprises if you decide to purchase the property. No property is perfect. So uncovering serious issues can help you in your negotiations on what you’re willing to pay for the property based on its overall condition.
Before hiring a professional to carry out the inspection, always request to see any preceding reports on the same property. While the report might be a bit older, it’s always recommended so you can see how well the house has been maintained or how much it has deteriorated.
Ideally, the professional will help you spot any issues that need a trained eye and that you can’t identify yourself. They can also uncover any cover-ups and adhere to regulatory standards.
The final report can identify building issues like:
- Faulty or leaking roof
- Rotting floorboards
- Structural problems
- Warping or cracks in the walls
- Rising damp
- Termite, rodent, insects, and other pest damage
- Safety hazards
- Asbestos signs
- Exposed and hazardous switches and sockets
As for the timelines, it’s generally recommended that you have your reports before you exchange contracts, or during the cooling off period. If you uncover any serious issues after these stages then it’s your responsibility to cover these costs, not the vendor.
Can I Do the Building & Pest Inspection Myself?
It can be quite tempting to save a few hundred dollars by downloading an inspection checklist and doing it yourself.
But the best thing is always to involve a qualified professional. Even if you’ve lived in a certain house or property type for years, you still don’t have the required expertise and knowledge to assess a property’s condition accurately.
Building and pest inspectors are trained to thoroughly evaluate the condition of a house and post any signs of damage. They are also trained to check hollow areas, crawl spaces, and roofs.
Avoid Relying on Building & Pest Reports Given by the Seller’s Agent
Getting a building and pest report before committing to the sale is crucial, but there’s a catch; avoid relying on a report provided by the seller’s agent.
While the report may have been done by independent and qualified property inspectors, because they’ve been engaged by the seller’s agent we have no control if they’re biased. The inspector and agent could be best friends for all we know.
This brings us back to our previous point of being cautious of any representations made by the agent, if you rely solely on their reports there won’t be any compensation available to you.
However, keep in mind that there could be some instances where you have no option but to use the agent’s inspectors. Such instances may be that you’re in a hurry and won’t be able to get your own report in time.
[.callout]💡 We often see clients thinking they’re getting a discount because they’re paying the agent a small fee for the reports, however upon a successful exchange of contracts, you’ll still have to pay for the full cost of the report. [.callout]
Case Study: Agent’s Building & Pest Report Excludes Termite Infestation
We had a client tell us of their friends horror story, who purchased a property near the Blue Mountains where they relied on the agent’s building and pest report.
There was one problem - the report didn’t mention that the property had a termite infestation.
Six months down the line, the client discovered that the whole house had a termite infestation. So dire was the situation that the client had to take action immediately or else the whole house would collapse.
They hired a builder to carry out the repairs. Upon analysing the building and pest report, the builder said that there was no way that particular infestation occurred within six months. The infestation must have been present way before the sale.
Since the sale had already gone through, the client had to settle the repair costs themselves.
Obtain a Strata Report for Strata Apartments
When investing in a strata apartment, you should request a strata report which includes the following:
- The body corporate’s bookkeeping
- Any restrictions on the strata property’s usage
- Disputes among the co-owners
- Structural defects and pending repairs
- Sinking funds and the amount of money in the administration
Review the Body Corporate Records & meeting minutes
The strata’s body corporate keeps up to 3 years worth of meeting minutes. Be sure to review these records and meeting minutes to make a much more informed decision. The minutes will provide you with information about any disclosures related to strata property and how much you’ll be paying in strata fees.
There are typically two types of strata fees you’ll be required to settle:
- Administrative Fund- This fund is used to take care of recurring expenses such as gardening, insurance, electricity, and water for the common areas.
- Sinking Fund- Used for repairs, such as replacing the roof, painting the building, and rectifying structural issues.
Clients commonly ask us, how do I know that the strata managers or body corporate has recorded everything in the reports?
The law requires strata managers to ensure certain records are kept. Failure to do so means they’re in breach of the law. You can rest assured that the law compels them to disclose certain matters.
Should I get a building & pest report for an apartment?
It’s not necessary to get a building and pest report for an apartment as it’s the Body Corporate’s responsibility to maintain structural matters of the strata scheme. That said, any structural or building reports would need to be for the entire building (which can be costly).
As an investor, you can start by going through the strata report first since it contains the body corporate’s minutes to see if there have been any motions put forward by owners to report any issues or defects before spending money on further inspections.
Obtain Survey Reports
Some contracts of sale come with a property survey report and others don’t.
A survey report is also known as a boundary survey.
It provides details on the property’s boundaries, such as the plot of land the property sits on, and other sub-surface changes such as a well or septic tank, as well as easements and encroachments on the property.
Knowing this will help you in the future when you intend to develop the plot or construct additional structures, such as a swimming pool, fence, or driveway.
On top of that, it also helps you know your area’s zoning restrictions and avoid any legal issues in the future.
Get Building Certificates from the council
A building certificate is an important document issued by the local council to provide information on the legal status of existing buildings or structures on a property.
Australia has specific building laws and regulations that may compel the local council to take action if a property owner violates the law.
The council may issue orders to a property owner to:
- Stop construction work that goes against the law
- Immediately repair their property
- Suspend construction until a building inspection is carried out
- Demolish unsafe buildings
- Pause repairs that intrude on neighbouring properties
This certificate assures both the buyer and seller that the council won’t file an order or take any action in the next seven years. With this document, you won’t have to worry about paying for demolition or repairs after moving in.
Apply for a building certificate as early as you can in the buying process to avoid any surprises from the council.
[.callout]💡 No law in Australia requires the property seller to provide a building certificate to the buyer. As such, it’s your responsibility to request one from the council as part of your due diligence. [.callout]
Enquire With RMS, Jemena Works, or Other Government Body Authorities
One aspect that many people forget to look at when conducting due diligence is to consider government agencies that may have some interest in the said property.
These agencies include the RMS and Jemena Works. The RMS stands for Roads and Maritime Services and is responsible for the construction and maintenance of road and waterways infrastructure.
On the other hand, Jemena Works provides energy services and solutions, such as electricity and gas networks.
Sometimes, these two bodies or others of the same kind may have pending infrastructural developments that will require you to give up your land.
To avoid such a scenario, you or your lawyer can directly reach out to them to reveal such plans for your land.
When Should All of Your Due Diligence Be Done By?
We advise you to do all your due diligence before formally exchanging contracts. This is especially crucial if you’re going to bid at an auction since they have no cooling-off periods. If you win an auction, you have to sign the contract and pay the deposit on the same day. Make sure you read out article on real estate deposit rules so you're well equipped for your property purchase.
Private treaty sales often have a 5-day cooling-off period. You can use this time to at least get the contract reviewed and have a building and pest inspection report ready.
Additionally, if you've decided to purchase the property via a Section 66w certifcate there won't be a cooling off period, this means you'll need to do your due diligence prior to the exchange of contracts.
Plan Ahead and Understand Your Current Circumstances
In a perfect world, it’s ideal to have your due diligence done before you purchase a property. But in reality that’s not always the case.
For example, let’s say you just got wind of an auction happening in a few days and you’re interested in attending, it may not be possible to get all of your due diligence done.
The time frames of attaining survey report can take anywhere between 3 to 4 weeks. Similarly, with a building and pest inspection report could take 3-4 business days to be ready.
Always plan ahead based on your current circumstances and keep these timeframes in mind when planning your due diligence.
How can Arver Law Help?
Ensuring you complete your due diligence correctly and thoroughly can make all the difference. An experienced property lawyer can assist you with contacting building & pest inspectors or strata inspectors to ensure you get independent reports that you can rely on.
We can also help you by contacting RMS, Jemena Works, or any other government body authority to retrieve any relevant certificates that may impact the property you’re interested in.
If you’d like peace of mind and know that you’re covering all your bases, call us today at (02) 7806 0623 and book in a free consultation with us today so we can ensure your property transaction goes smoothly.
