What is due diligence?

12 June, 2012 | Wade Hansen

Whether it is to be the family home or an investment, buying property has a big impact on your financial future. It is important that you ensure you have all the information you need about a property before you buy. This information gathering is called “due diligence”.

Ideally you would complete your due diligence prior to making an offer on a house. This is particularly important if you are looking to purchase at auction, as auction bids are unconditional.

However, sometimes you need to make an offer quickly, without time to complete due diligence. In this situation, you can include clauses in the sale and purchase agreement which will allow you to carry out due diligence, even after signing the agreement. For essential clauses to include in your agreement – see Pitfalls of Residential Property Purchases – Essential clauses for your Agreement

Check out the local community

You should take time to review the area the property is situated in – visit the property at different times of day to look, listen, and smell. Talking to neighbours can be a good way of learning about any quirks, or to find out if the property has previously been used for unscrupulous means.

Access to schools, public transport, shopping and public amenities such as libraries and swimming pools can have a big impact of future property values. But it is also wise to investigate whether there are any major developments planned, upcoming roading projects or zoning changes that could affect the character of the area. The council can provide this information.

LIM report

A Land Information Memorandum is a report from your local Council, which provides information on the property. A LIM will advise if there are any ‘requisitions’ on the property (e.g. notices to fix), if the buildings on the property have the necessary building permit or consent and have they been signed off or a code compliance certificate issued. It will also note if the property is subject to any resource consents, if there are any drains running through the property and so forth.

Building inspection

You should make the agreement conditional on a building inspector checking out the property. The inspector will look at the structural integrity of the dwelling and advise you if there are any issues or defect with the dwelling. You can then either negotiate with the vendor have the defects rectified, accept the property with the defects known or cancel the agreement. It will also give you an idea of any renovation or upcoming maintenance costs.

Valuation

It may be prudent to make the agreement conditional on you being satisfied with a valuation on the property. Your bank may require this, particularly if the agreement is not made through a real estate agent. This will ensure you are not paying too much for the property and what the rental or resale potentials are of the property.

Title, Easements & Covenants

The agent should give you a copy of the title. Make sure you understand what the different types of title mean. Do you understand what any easements or covenants on the title mean? If you are buying into a property with a body corporate, do you understand all the rules and additional fees? All of these things can affect what you can and can’t do to the property in the future. Read “What is a residential property title?”

Finance and funding

Consider rates, insurance and other financial expenses such as body corporate or land/homeowners association fees when calculating your finances. And if possible, ask your bank or other lender to approve finance in advance, so you know what you can afford. Many banks have special offers – try to negotiate for your lender to cover your legal fees.

Ownership Structure

Think about who is going to be purchasing the property – a family trust, a company or you personally? Different legal and tax implications apply to different ownership structures. And the correct legal name will need to be used when applying for finance and on the sale and purchase agreement. To learn more about these issues, read Finance considerations when purchasing a residential property.

Complete the due diligence investigations that don’t cost anything first, but keep in mind that requesting a LIM can take up to 10 working days, and that if you are getting a valuation or building report you will need to liaise with the vendor for an appropriate time for the appraisals to take place.

Remember that once you have signed a sale and purchase agreement (made an offer) you can’t back out of the contract if you find any problems with the property unless those problems are specifically covered as conditions to be met prior to your offer going unconditional.

If you have any questions regarding pre-purchase due diligence, or advice on buying a house, contact property law expert, Wade Hansen by phone on 09 837 6885 or email wade.hansen@smithpartners.co.nz