Due Diligence – How Much is Enough?
When purchasing existing residential premises, most people do not consider due diligence until after they’ve entered into a contract to buy the property. This is a common mistake. Once you’ve signed a contract, if you later discover ‘issues’ with the property that you didn’t know about at the time of signing, you’re not necessarily able to pull out of the contract. (Section 32 of the Sale of Land Act provides a discrete list of things that must be disclosed, failing which a purchaser will have a right of rescission. It does not cover everything, so you are far better off making your own enquiries prior to signing a contract. Do not solely rely on what is in the Section 32 statement.)
How far you take all of this obviously depends on the time available, and your budget. But you should at least consider the steps below before signing the contract.
Read the full contract and section 32 statement thoroughly and carefully. There is no excuse for not doing this. Pay particular attention to the plan of subdivision, and precisely what you are buying. Look at any easements and covenants. If there is common property, understand where your lot starts and ends (laterally and vertically).
If it’s at all unclear to you, sit down with your lawyer and go through it with them. Tell them what your intentions are with the property. Do you intend to live in it? Rent it out? Demolish and redevelop the site?
Your run of the mill building inspection will cost around $500 and won’t give you a lot of information. If it looks like any building work has been undertaken within the last seven years (even if there is already an inspection report included) consider asking your lawyer for a referral to a more experienced building consultant (or a structural engineer if it looks like structural work might have been undertaken). They will spend more time looking at the building, and give you a more detailed report. The costs vary, but around $5000 is not uncommon.
(This step can be undertaken after signing the contract, if your solicitor provides you with an appropriate special condition making the contract subject to passing a building inspection.)
Standard sized residential properties can be ‘desktop’ surveyed for around $500 to give you an initial view of whether or not the title boundaries are in the right spot. If they’re not, you will need a more detailed survey, but the important point is that you get legal advice immediately. You may be entitled to make an adverse possession application, and in that case, you will most likely need a ‘deed of assignment’ from the vendor, as part of the contract of sale.
Have there been disputes with neighbours in the past? Ask the agent, or even better, ask the neighbours. You may feel a bit awkward doing this, but if there’s an ongoing issue, neighbours will usually be pretty upfront about it. The last thing most people want to do is buy into a legal dispute.
Sometimes things just aren’t discovered until further down the track. Title insurance is a fairly new product in Australia, and can cover risks including:
- Illegal/unapproved building works
- Unpaid rates and taxes
- Fraud and forgery; and
- Dealings with the property by third parties after exchange but before the incoming purchaser settles and is registered on title.
Title insurance generally costs under $1000 for most properties.
If you did all of the above with bells and whistles attached, it would probably cost about $15,000. Whilst we would not suggest you do things that are unnecessary, $15,000 is a drop in the ocean compared to what some spend in legal and repair bills down the track, if issues do arise.
It is easy to get caught up in the excitement when purchasing a property, but before you sign a contract please at least consider the above matters.