DUE DILIGENCE… IS WHAT YOU SEE… WHAT YOU GET?

To exercise this risk mitigation approach we may use conveyancer and lawyers to assess contractual and legal risks with the property including the agreed terms of a sale and the conditions under which the property is sold. What are the land surveys and boundary lines, easements, and right of way, are there any caveats or liens on the title?

Physically you might employ Pest and Building reports to assess the state of the building, or to get an estimate of building, remediation, or renovation costs. Surveyors may confirm the boundary areas. Landscapers and trades to drain water and remodel the site. Geotechnical surveyors to assess the subsoil condition of the block.

When a property is sold at Auction it is an unconditional sale “as is where is” – so more due diligence is required as caveat emptor exists “Buyer beware”. However, property sold under a private treaty carries more obligations and potential exposures that exist past the settlement date. To maximize a clean sale the property should have occupancy certificates from the council and building works should be approved and compliant. Swimming pools should be fenced and certified, the buildings should be correctly distanced from boundary lines and setbacks. If not you will inherit a problem.

Many of these considerations can affect your financing. Lenders assume the risk of the property when they fund your purchase. They will also exercise their due diligence upon you as a customer and the property being purchased. They have checks and balances over and above yours.

Case Study:

An owner of a property in a prestigious North Shore suburb bought one property and then a neighboring property. In property one they expanded the landscaping and retaining walls onto the adjoining property, and they resumed some land for street access that was also on the adjoining block. The swimming pool on property one was non-compliant with fencing and the pool outdoor area was extended onto a portion of the adjoining block. This is fine but they did it without council approval. When going to sell property one they had included all the land area and access that belonged to the adjoining block on a separate title. This was unacceptable.

The purchaser discovered the land boundary anomaly with surveys, and it was apparent there was no council compliance with the extra developments or a readjustment of land titles. The net impact was the vendor could only sell the space that it had rights to under the title. Their price expectation of $5.5 Million was reduced to a settlement value of $4.25 Million and had to be rectified. Momentum was lost in the sale. Due diligence also unraveled major disputes between the vendors and their neighbours, and refused applications with the local council, and land and environment courts.

This situation was not only a question of price… would the stigma of past owners and belligerent disregard of others continue with the neighbours? The contract and property marketing excluded these issues. Due diligence clearly showed “Is what you see what you get?” the answer is “No” … prove what you have or it doesn’t count.

For a buyer who is aware of the risk, this can also be an opportunity for a price adjustment, for the vendor it is a major breach in their armour that will have consequences on potential buyers and prices alike.

Due diligence allows a purchaser to go into a potential purchase with ‘Eyes wide open’ rather than with ignorance. If issues are discovered, then it is a risk assessment or a conscious decision to proceed thereafter. However, reasonable care has been exercised.

Due diligence is a cost in a transaction but often it should be considered and treated as insurance. When spending large sums on any acquisition it would be prudent to exercise this care and do some checking. The property industry is full of people with expertise to assist in these processes. Outsourcing this due diligence to a specialist is wise. Utilising the services of a buyer’s agent generally incorporates the coordination of these professionals and assists in discovering due diligence gaps.

Buyers Agents make sure these processes are observed and that the process of purchasing property is executed in a timely and professional manner. They work as part of your property acquisition team.