Thorough research is critical to dodging property purchase problems

When conducting due diligence into property, most people think getting the contract checked by their solicitor is enough to cover their legal backsides, but the reality can be painful.

I recently inspected a property in Melbourne’s eastern suburbs and thought it was a good piece of real estate that needed further investigation.

My main concern was that the neighbouring property was on a substantial parcel of land with an old, rundown house on it. When I took a closer look I noticed the back fence that led to a laneway had completely fallen over and there was no sign of it being fixed.

Alarm bells started to ring as I thought this property could be a potential development site.

I asked my solicitor to review the section 32 to determine if there were any planning permits in place that may affect the property and was informed that nothing was disclosed in the paperwork.

In most cases if there is no disclosure in the section 32 then you can rest easy. However, a quick five-minute check on the local council website was all I needed to discover that there was, in fact, a permit in place that had been issued last year and this had not been fully disclosed.  If the vendor is aware of a planning permit that will have a material impact on the property, they have a legal obligation to disclose this information.

The local council was able to email me the full plans of the neighbouring development within a matter of minutes and I was able to determine that this new development will have a detrimental impact on the property I was looking at.

The discovery of this information does not necessarily mean the property should not be purchased, however it can – and in this case did – have a dramatic impact on the value of the property. This information is vital, as it will influence how much you should be prepared to pay for the property.

So, what happens if you sign a contract to buy a property and then discover some mandatory information was not fully disclosed?

If you discover the omission prior to settlement then you are standing on reasonably solid legal ground. If it is determined that the non-disclosure will have a material impact on the property you can notify your solicitor and instruct them to rescind the contract on the grounds that the section 32 did not make all mandatory disclosures. You are then in a position to re-negotiate the contract taking into account the new information or walk away from the property completely and get your deposit back.

However, if you settle on the property and then realise there is a non-disclosure issue, the solution will not be so straightforward. Given the property has already settled, the onus comes back onto you to enforce your legal rights. This means although you do have a legal recourse to sue the vendor, the cost of taking this action could well exceed the financial benefit. Also, working your way through the legal system is very time consuming and not something in which you really want to get bogged down.

For most people, buying property is the biggest financial commitment of their lives, so it pays to take the time to do that extra bit of research. As with most things in life, preventing a problem is much better than trying to find the cure.

MARK ARMSTRONG is a director of ratemyagent.com.au, Australia’s number one real estate agent rating website.

This article was originally published on Property Observer in April 2013.