Buying a home is likely one of the largest financial transactions you will make. When you find the ‘right’ property, it’s easy to get caught up in the whirlwind of excitement that comes with it. However, before signing a contract and committing to the deal, it is essential to conduct thorough due diligence.
Due diligence is the process of investigating and evaluating a property to ensure you understand exactly what you are buying. It helps protect against expensive surprises, such as hidden structural defects, unapproved building work, or legal restrictions that can seriously impact your use of the land.
Due diligence typically covers three important areas: physical, legal, and financial. Getting it right can be the difference between a sound investment and a potential nightmare.
1. Physical Due Diligence: Inspecting the Property’s Condition
You cannot rely on a quick walk-through during an open house to thoroughly assess the physical state of a property and other dwellings. You need professional, objective assessments.
In many jurisdictions, building and pest inspections are not mandated as a vendor disclosure, but they are strongly recommended for prospective purchasers. As laws and regulations vary, check the specific requirements in the state or territory where you are buying.
If the house has a swimming pool, you may also require a compliance certificate. Again, check the relevant legislation and requirements in your area.
For strata properties (units/townhouses), a strata inspection report is essential.
Drainage diagrams (if not mandatory) are also advisable.
Building and Pest Inspections
- Building report: A qualified building inspector will check for major structural defects, such as significant cracking, roof issues, faulty drainage, rising damp, or poor workmanship.
- Pest report: A pest inspector will check for timber-destroying pests, primarily termites (white ants). They look for active infestations, evidence of past damage, and conditions that might make the property susceptible to future attack.
To protect your interests, ensure the contract contains a building and pest clause that makes the purchase conditional on satisfactory inspection – always check this with your conveyancer or property lawyer.
Strata Reports
Inspecting the records and associated documents of a strata scheme provides important information unique to strata properties.
- Financial health: A strata report investigates the body corporate’s financial records, including the sinking fund (money saved for future major repairs like roofing or lift replacement) and the administrative fund. A low sinking fund could mean you will be hit with an expensive special levy soon after you move in.
- Maintenance issues: The report reviews meeting minutes to see if any major structural or maintenance issues (e.g., concrete cancer, leaky balconies) have been discussed or reported but not yet fixed.
- By-laws and disputes: By-laws govern the strata property and cover things like pet ownership, noise restrictions, or renovations. Reports can check for any history of disputes between residents.
2. Legal Due Diligence: Checking the Title and Contract
Legal due diligence should always involve a review of the contract of sale by a licensed conveyancer or property lawyer, a title search to confirm legal ownership, and checks for easements, covenants, and caveats. Zoning and planning overlays must be confirmed, and all structures (like renovations, decks, and carports) should be checked for council approval, as unapproved works become the buyer’s issue after settlement.
Reviewing the Contract of Sale
Your conveyancer or lawyer will review the contract, including the general conditions and any additional special conditions. Special conditions are often added to protect the vendor (seller). Your lawyer or conveyancer should review these to ensure they are fair and reasonable, and in some cases, may request that they be amended.
Title Search and Ownership
A search of the property’s title will disclose:
- Ownership: Confirms that the seller is the legal owner and has the right to sell the property.
- Easements: Reveals if another party has a right to use a portion of your land (e.g., for drainage or a shared driveway). This can restrict future development.
- Covenants: These are rules or restrictions imposed by a previous owner or developer that limit how you can use or develop the land (e.g., restrictions on building materials or building heights).
- Caveats: Confirms if another party has lodged a formal claim against the property, which could block the sale.
Council Approvals and Zoning
You need to know that all existing structures are legal and that the property can be used for its existing and any proposed future purpose.
- Building approvals: Check with the local council to ensure any renovations, extensions, decks, or carports on the property have the proper council approval and final certification. Unapproved building work becomes your problem to fix and certify after settlement.
- Zoning: The property’s zoning defines what the land can be used for (e.g., residential, commercial, industrial purposes) and can help flag any restrictions on future development.
3. Locational and Financial Due Diligence
External factors that affect your long-term enjoyment and the property’s value should be investigated.
Neighbourhood and Development Checks
The property exists within a community, and you need to know about your surroundings.
- Visit at different times: Visit the street and neighbourhood during the day, in the evening, and on a weekend to check for traffic, parking issues, and noise levels.
- Council planning: Check the local council’s website for any development applications nearby. A proposed block of flats next door or a major road upgrade could severely impact your view or peace and quiet.
- Natural risks: Investigate the property’s susceptibility to natural hazards like bushfire risk or flood zones. This can drastically affect the cost and availability of your insurance.
Financial Assessment
Understanding your loan approval and conditions, and factoring in all associated costs of your property purchase is vital. The whole picture should align with your budget.
- Unconditional finance: Formal finance approval should be in place before contracts are legally binding. If your offer is subject to finance, you must secure formal loan approval (not just pre-approval) before the finance deadline in the contract expires.
- Hidden costs: Budget for all the expenses beyond the purchase price, including stamp duty, mortgage fees, conveyancing fees, insurances, and ongoing costs like council rates and strata levies.
Conclusion
Completing due diligence relies on getting the right advice from the right people. Taking a methodical approach empowers you to negotiate effectively, walk away from a bad deal, or proceed with confidence in your property purchase.
This is general information only and does not constitute legal advice. Property laws and conveyancing processes vary between states and territories, and buyers should always seek professional advice tailored to their location, the property they are buying and their individual circumstances. For more information, help, or advice, please call (02) 4382 2200 or email [email protected].