The three stages of due diligence to conduct before buying an investment property

The spring property market is in full flight with a record number of properties changing hands. But Christmas is approaching fast and many buyers may start to feel the pressure to buy before the market goes into the summer recess.  

I have seen this happen to many buyers in the past. They get tired of looking for a property and they just want to get it over and done with. They end up taking short cuts and make decisions without getting all the facts.  

By finding out as much about the property as possible, you can make an informed decision about whether to bid or negotiate for the property.  

There are three stages of due diligence you should carry out (preferably assisted by a solicitor or conveyance who specialises in property transactions).  

The first concerns structural integrity. There’s little point in spending hundreds of thousands of dollars on a property, only to find after the purchase that you need to spend thousands more rectifying structural problems in the roof, walls, floor or sub-floor space.  

If you’re buying a house that isn’t brand new, obtain a building inspection from an architect or registered builder who can reveal any problems you aren’t aware of. If you’re buying a unit that’s part of a building with an owners corporation, it’s the owners corporation’s responsibility to maintain the building in good structural order. You can find out about the building’s structural integrity through the vendor’s statement (also known as a ‘section 32’ statement).  

This is where the next stage of due diligence comes in. Under Victoria’s property laws, the vendor is responsible for providing you with a statement providing important technical information about the property and its immediate surroundings. The vendor’s statement should have a copy of the title to the property including the main buildings and any ‘accessory units’ such as garages or car spaces. This will tell you exactly what you’re buying for your money.  

The statement should provide documents from the local council indicating whether any works are planned on adjoining properties which could affect your use and enjoyment of the land. For example, if you’re buying a single level house and the owner of the property next door has plans to put on a second story, knowing this in advance means you can consider how it may impact on your privacy and light levels.  

The vendor’s statement should include documents from utility providers such as electricity and water suppliers regarding the presence of any ‘easements’ over your land. An easement is a portion of land that you legally own but which must remain accessible to the utility provider if they have to undertake repairs to storm water drains or overhead power lines. This may affect your use of that portion of the land, including whether you can build on it.  

The last, but by no means least important stage of your due diligence is to make sure that, when you sign a contract to buy the property, you will have sufficient funds available to meet settlement on the agreed date. If you can’t meet your obligations under the contract, the vendor is legally entitled to keep your deposit. If they re-sell the property for a lesser amount than they sold it to you, they can sue you for the difference.  

Undertaking all this legwork may sound daunting, but it’s infinitely better than buying in haste and discovering major issues when it is too late.


Mark Armstrong is a director of iProperty Plan, which provides independent analysis and tailored advice to investors and home buyers.  

 

Mark Armstrong

Mark Armstrong

Mark Armstrong is a director of ratemyagent.com.au, Australia's number one real estate agent rating website.

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