So, you think you’ve finally found the one? Months of searching online, the rollercoaster of anticipation, knock-backs and near wins – they’ve finally resulted in success. You’ve found a property that seems to tick all the right boxes. Yay!
Before you get too excited and rush into signing a Contract of Sale, take a pause to run through my 6 cornerstones of property due diligence. These are vital steps if you don’t want to buy a property you later regret.
You’ve got to remember, not every rough diamond is a gold mine waiting to be discovered. When you’re shopping for cosmetically tired properties, you can easily come unstuck if you buy something that’s riddled with unforeseen problems that end up costing a fortune to remedy. That’s your profit sunk, right there!
Having personally renovated 127 properties over my 29-year renovating career, I’ve developed a property due diligence checklist that contains 65 things I always check on a property before my Contract of Sale goes unconditional. I know what you’re thinking … that must take her forever! Truth be told, 2 days or less to be precise. For the most part, these 65 individual research points can be categorised into 6 broader research categories below.
1. LOCATION DUE DILIGENCE
This is probably the most talked about of all the due diligence musts. “Location, location, location” – it’s the mantra that property investors have chanted for decades on end. However, it doesn’t matter what award-winning renovation you do, if your property is situated in a dud location, your resale value will always be price capped.
In addition, poor locations severely diminish your pool of available buyers. Most people just won’t consider living on a main road or a busy thoroughfare. Properties located too close to shops, that noisy school next door or that electrical substation just 50 metres away are all major turnoffs for buyers.
Some of these are what I call “buyer objections”, a flawed attribute about a property. It’s great to buy a property that has lots of buyer’s objections which you can fix through a clever renovation or other. Just don’t buy a property with numerous flaws you can’t solve.
Considering the unprecedented bushfires and floods we’ve experienced over the last few months, it’s a timely reminder not to limit your location due diligence to just the immediate property radius. Smart investors should research a broader span of area to consider all location impacts. The likelihood of fire, flooding and the like can directly affect property values, even if those things aren’t right on your doorstep.
2. PHYSICAL DUE DILIGENCE
This is all about the physical condition of the property. Before you sign on the dotted line, you’ll need to truly understand what condition the existing property is in and the likely cost for repairs to correct anything that’s not right (immediately or in the future). It’s why critical inspections like building, pest and asbestos inspections reports are so crucial. Getting a roof replaced, a property rewired or restumped are not cheap fixes by any means. It’s better you know these costs (before you buy), so you have half a chance at trying to negotiate these costs off your purchase price.
By way of example, one of my physical due diligence checks is a CCTV plumbing inspection. Once I’ve got my price agreed, I’ll send my plumber to the property to put a camera down the underground lines to make sure there’s no cracked pipes or tree roots inferring with drainage. It’s worth spending $200 – $400 (approx.) to potentially save thousands in repairs.
Let’s not also forget the other location desirables like a level, regular-shaped block, a particularly wide street frontage or buying on the high side of a street so your views won’t get built out. Knowledge is power, so the aim of physical due diligence is to find out as much as you possibly can, before you commit.
3. ENVIRONMENTAL DUE DILIGENCE
Things like land contamination can cost a fortune to fix and the process of remediation can stretch out for months on end. In the meantime, your holding costs can continue to rack up (whilst waiting for contamination issues to get sorted).
I recently assessed a property purchase near Byron Bay. My due diligence uncovered UXO contamination. For those of you that don’t know what this is, its risk of unexploded artillery. Back in 1947, the site was used as a post war military training ground. Today, you’d never imagine the site had that history. To cut a long story short, $1 million plus in likely remediation costs. Yep, I walked away …
Don’t forget also that any property built or renovated before 1987 has a high likelihood of asbestos lurking somewhere. Be sure to get an asbestos inspection report done.
4. REGULATORY DUE DILIGENCE
This is particularly relevant if you’re contemplating a full structural reno and need to establish exactly what changes are & aren’t possible. There’s no point dreaming of that 2nd storey on your house to capture potential water views, if your council won’t allow it.
Even for cosmetic renos, you need to be across regulatory compliance. In an apartment block, you’ll need strata & potentially council approval, if you’re doing a full-blown kitchen or bathroom reno or swapping out the carpet for a floating floor.
Is the property heritage-listed? If so, changes you’d like to make may not be possible on your façade or other areas too. Even some decks and carports require approval, depending on the size and height they are & which council area you’re located in. Head to your local council for a face to face chat with a duty planner. You’ll quickly discover what you can & can’t do.
5. LEGAL DUE DILIGENCE
Hopefully you’ve got yourself a good property conveyancer, solicitor or lawyer, in which case he or she should be checking all the legal paperwork in your Contract of Sale to ensure your potential purchase doesn’t have any legal constraints or issues that would adversely affect your interests. I’m talking things like easements, any finance outstanding on the property, caveats, covenants, boundary surveys… They’ll also look at a series of other legalities as part of their own scope of work as a legal professional.
6. FINANCIAL DUE DILIGENCE
These are checks you can easily do yourself. An RP data search throws up a lot of useful information, such as what the property has been bought & sold for over the years. Make sure you know what the costs of holding the property are moving forward – council rates, water rates, strata fees & land tax to name a few. All of these can add up to a significant amount of cash each year, for those that jumped too quickly into a purchase.
At the end of the day, the key to an astute purchase is making sure you do proper and thorough property due diligence on every property you buy, from here on in. Depending on what stage the property market cycle is in (boom, slowdown, slump or recovery), time may not always be on your side to do all your proper due diligence checks. In these situations, you can enter into a Contract of Sale with a 5-day cooling off period. This gives you formal control of the property, not formal ownership. If for any reason your due diligence reveals a lemon, simply exit the contract with a 0.25% of the purchase price penalty fee.
It’s easy to thoroughly research a property before you buy so you’re fully versed on a property’s good & bad points at the right price. Remember the wise saying: Act in haste, repent at leisure. Make sure that’s not you.
To learn how to thoroughly research a property before you buy, enrol in our online Cosmetic Renovations For Profit course now.