Once you’ve found your dream home or the ideal investment property, it’s not as straightforward as making your best offer and receiving the keys. There’s also a process that needs to happen pre-offer that’s fairly lengthy and involved.
This process is known as due diligence, and it’s a multi-step operation encompassing legal enquiry, building checks and risk assessment. Doing your due diligence ensures the property you’re buying is up to scratch and can help you avoid costly problems further down the track.
We chatted to our Purchase Support Lead Jessica Bialkowski about what the process typically entails and what to look out for at different stages.
The property
First up: the building. While attending an open house is a good way to assess the property’s viability as a purchase, it can only tell you so much.
In many cases, there are underlying issues that are only detectable by doing a thorough investigation. Here, Jessica says you’re best calling in the professionals to give you the all clear.
A building and pest report – performed by a professional – documents any structural problems (such as large cracks and uneven flooring), safety hazards, defects and areas that need work. It also detects the presence of issues like asbestos, rising damp, mould, termites and termite damage. At Milk Chocolate, we also recommend separate invasive plumbing and electrical reports to gauge any faults on either front.
“Professionals are much better positioned to advise whether an issue is serious or not, such as whether cracks in the walls are considered normal movement of the home or something more serious,” says Jessica. “A good professional will inspect the home top to bottom, including the roof void and subfloor, which are generally not areas you get access to at an open house.”
Jessica mentions a few other things to vet, many of which are more geared towards the block. These include orientation, land size, whether the block is level, zoning and potential future opportunities, and whether the property is heritage-listed (that last one often comes with strict rules and regulations if you want to renovate or repair).
The location
No home is an island, and the surrounding location can have a big impact on the feasibility of a prospective purchase. Jessica mentions that your neighbours, the neighbourhood’s make-up, and the property’s accessibility to schools and attractive amenities all affect its value.
She adds that there are several red flags which could indicate that the property is a poor purchase. These include proximity to noisy main roads; major development applications (DAs) that could impact things like noise, traffic or views; the zoning of the immediate surrounds to evaluate the risk of nearby future development; and whether the property is under a flight path.
Another major part of the due diligence phase – and one that’s likely to become increasingly important – is assessing the area’s natural disaster risk. In Australia, two of the biggest threats are flooding and bushfire, which pose very real danger to properties in both regional and urban areas.
To help determine the risk of natural disasters, Jessica says the Milk Chocolate Purchasing team always gets an insurance quote. This is to see if insurers identify any red flags and reflect these with high premiums.
You can also check if the property is prone to flooding via the local council, which typically provides flood mapping. Bushfire mapping, on the other hand, is supplied by your relevant state government.
The contract
As with any contract, the property’s contract of sale will likely contain numerous key points that are well worth going over very closely (a fine-tooth comb certainly wouldn’t go astray).
During this phase, the contract of sale is reviewed and any urgent issues are documented. Other important things to take note of include key terms and clauses (such as whether it’s a conditional or unconditional exchange), dates (like the settlement date) and any advice on easements (whether another party can use your land for a specific purpose) and/or encumbrances (restrictions on how you can use your land).
You should ensure every piece of documentation required in the state of purchase is included, too.
Jessica says you also need to understand the responsibility you’re taking on by entering into the contract, as well as the risk in case you’re unable to complete the purchase.
As for red flags, there are several things to look out for that could be cause for concern, or at the very least some professional advice. These include:
Punitive special conditions that favour the vendor (such as being able to cancel the contract prior to settlement if a better offer comes along)
Any issues with the title document such as a caveat
Automatic release of deposit clauses (these are not always appropriate and the risk should be explained to you by a legal professional)
If the property is reserved for acquisition by the state government or if the vendor has disclosed any other material facts
Lack of compliance certifications (such as smoke alarms or the pool, depending on your state). This is because you’ll inherit the non-compliance if it’s not enforced at the time of sale
Jessica says this part of the process is best done with the support of a legal professional, such as a conveyancer or property lawyer.
“There are a lot of standard terms in a contract of sale with generally accepted interpretations/applications that lawyers and conveyancers all understand but that you may not,” she says.
“You also need to have professional representation in case there is an issue, such as a delay to settlement caused by yourself or the vendor, or a dispute regarding the condition of the property at settlement.”
In short, she says, a legal professional’s aim is to ensure you come away with the best possible outcome: “You need someone to advocate for you and negotiate special conditions on your behalf to ensure they are fair.”
Would you like to know more about property due diligence or are thinking about purchasing and want some advice? Book a complimentary 30-minute session with a Milk Chocolate purchasing expert by clicking here.
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