9 Property Due Diligence Checks Before You Buy
Access to property information has become more freely available now that the internet age is upon us, but despite this increased level of accessibility, many property buyers fail to complete the necessary due diligence before committing to a property purchase. I’ve seen buyers jump in and act quickly on a purchase, literally spending hundreds of thousands of dollars, and only after it is too late – they learn that they have made a big mistake. It doesn’t happen to everyone …. But it does happen to some.
In this article, I outline nine important property due diligence checks that every buyer should complete before buying a property – either as a home or an investment. Following these guidelines will ensure you uncover all of the “invisible” things in relation to a property and its location.
1. Thoroughly inspect the property and the neighbourhood
I always fail to understand how some buyers (predominantly investors) are comfortable to buy a property site unseen. For some people, that may come as a surprise but believe me … it happens. You see, there is so much that you learn about a property through a physical inspection, supported further by a drive around in the local neighbourhood.
You simply cannot rely on images provided by a sales agent on a real estate listing to provide the full story. What you cannot see in listing photos is what the streetscape looks like, the quality of the adjoining homes and any potential noise impact from nearby transport corridors, local industry or even the neighbours themselves.
Furthermore, seeing a property with your eyes rather than through a wide frame lens often results in a more realistic expectation of the room sizes, layout and build quality. You may have already experienced this when you have been searching for a property. I’m sure there have been times where you have realised that a property looks a lot better in the listing photos than in real life!
During an inspection, you can also determine any potential maintenance issues such as broken door hinges, tap leaks or even things like loose handles. While these things may be detected in a building and pest inspection (which you will pay for of course), it is often better to have a clear picture of how well the property has been maintained before you commit financially or emotionally towards a purchase.
2. Surrounding housing density
There may be nothing more heartbreaking for you as a property buyer if you find out too late that you will be negatively impacted by future medium or higher density development. This happened to someone I met recently.
During the construction phase of a small townhouse project that I was managing on behalf of Clients, I reached out to the adjoining neighbour to discuss the dividing fence between the two properties. This neighbour had moved into their “dream” home only a couple of weeks before we commenced demolition right next door, and we were replacing 1 house with 3 townhouses.
Unfortunately, the new home buyer had not completed any due diligence to discover that she was going to be living next door to townhouses. She assumed because there was a house on the site, that it would always be a house – she never even thought about an alternative option.
But a simple search of nearby approved developments would have uncovered this information and saved her the heartache of discovering this information too late. She actually told me that she would have never purchased the home if she knew she would have 3 adjoining neighbours instead of just one.
Of course, even if there are no approved developments nearby, another useful thing to check is the capacity of the land for any potential future development. It may not be approved now, but if the council planning scheme allows for development to a higher density in the surrounding area, it is better to find out before you buy so you know what a neighbourhood might look like in the future.
3. Suburb demographic profile – understand who your neighbours are likely to be
There are some simple ways to check who your neighbours are likely to be before buying a property. Suburb profile data is readily available online, and you can easily determine if the area is made up predominantly of owner-occupiers or renters. The general spread across all housing is approximately 70% of all properties being owned by owner-occupiers versus only 30% being owned by investors. If you are a home buyer, you may want to ensure you are living amongst other homeowners? If you are an investor it may be important to you to invest in an area that is not already saturated with other investors?
You can also get a snapshot of the income levels of people in a particular suburb as well as household related data such as who is the predominant population group (eg: singles, couples without children, young families, established families, older couples, etc). This type of information is excellent for getting a broad understanding of an area before you are committing a significant sum of money towards a property purchase.
4. Certification and/or Home Building / Home Warranty insurance for renovations and extensions
Many homes that are sold, may have at some stage in the past, been renovated or extended, or perhaps even additional features such as a carport or a deck may have been added. It is important as a property buyer to understand if these types of improvements have been certified. Usually, any type of extension or modification that requires a Building Approval will require a final certificate to be issued to verify that the works have been completed in accordance with the Building Code. Approved Building Plans should also be available. As a buyer, you have a right to ask for this information and the seller should have no problem supplying it if the works have been completed in the right way.
If not, then you must understand that the improvement works may not have been completed according to the building code, and therefore as the property buyer you would take on any potential risks associated with this.
Additionally, if the improvement works were completed within the last 6.5 years, it is likely that the works may still be covered by Home Building or Home Warranty Insurance. Again you can ask for verification of this if you are unsure and this type of information could help you to understand if the property is worth pursuing or not.
5. Review of Owners Corporation / Body Corporate records and meeting minutes
Property buyers who are considering purchasing a property that is governed by an owners corporation or a body corporate, should always understand the contribution and sinking fund costs associated with this type of scheme and I definitely advise to ask for a copy of the most recent Owner’s Corporation or Body Corporate meeting minutes.
You might be surprised to learn of some high-cost maintenance issues that have been reported but not yet completed, but once you become the buyer the liability to contribute to the costs for any necessary rectification or maintenance work will become yours. This is one thing that could save you a lot of headaches down the track.
6. Adverse risk from flood / fire / noise / environmental impact etc
There are many potential adverse risk factors that can have a negative impact on a property and its value or holding costs. Unless you check for these things, you may never know until it is too late.
Flood is quite obvious, especially in areas built around river or creek systems. We know that in a significant rain event, rivers can burst at the banks and creeks can swell and spill over into residential areas. But other types of flood impact may be less obvious. Storm surge impact or overland flow should also be checked.
Then there are other types of risks including bushfire hazard, noise overlays and environmental impacts, which will all impact the way you would assess a property at the time of purchase.
7. Underground services
This is something that is often overlooked. Underground services including water pipes, sewer pipes and stormwater pipes may lie underneath a property and the only way you may know is by completing an underground services search.
For some buyers, even if these types of assets were discovered, it may not impact the way they intend to use the home. But for other buyers, especially those looking to dig a pool, extend through renovation or even redevelop, then the existence of these services can be a deal-breaker.
8. School catchment zones
Often people buy in a certain area because of the local school that they intend to send their children to. Some schools have enrolment management programs, so if you fall just outside the school catchment zone, you may not have a place for your children. It is important to understand that school catchment zones do not align with suburb boundary lines, so you must double-check to ensure the property you are looking to buy falls in the catchment that you desire.
9. Historical Capital Growth
Although for many people the only property they may ever buy is their family home, understanding how that asset can build a future nest egg is valuable for ensuring a more comfortable retirement. As Property Investment Professionals we can never project with certainty how a property’s value will increase in the future, but we can get an understanding of what has happened in an area in the past to get a clearer idea about where a property’s value may be headed in the future.
I always encourage people to take a 10-year view. What has happened over the most recent 3-5 years may not necessarily be reflective of the longer-term trends. Property markets move in cycles and over the past 100 years or more in Australia the general trend is always up. But some markets will perform better over the longer term than others, so this is important to understand if building long term wealth is your goal.
Spending time at the beginning of a property search to understand what you are really buying certainly pays off over the longer term. After all, most people may only ever buy one or two properties in a lifetime.
You don’t want the experience to ruin your future.
Transactional costs in property are high, so mistakes can be very costly. The first step is learning about what you may not have ever considered and then the next step is ensuring that you take the necessary steps and perform the required due diligence to avoid making costly mistakes. But my best advice is don’t rush in if you are unsure about the due diligence process, take the time to find out about all of these “invisible” things and then move ahead with a property purchase with more certainty and confidence.
Originally posted in http://www.apimagazine.com.au/