Invisible dealbreakers

Due diligence counts for everything. It’s the hardest, most time-intensive part of our process. From strategy formulation to searching, bidding to settling, due diligence is a critical and serious step in the process.

So what is due diligence?

In our case, it involves us considering every possible negative facet and either eliminating the risk, or fully understanding the specific risk in order to weigh up the property purchase decision and/or the subsequent walk-away price.

Due diligence items can be obvious, hidden or invisible, and without a legal review, specific certificate and title searches, and a personal inspection of the property, some items may go unnoticed.

While some may devalue the property, others may deem the purchase decision null and void altogether.

Some of the obvious items can include location-based things such as neighbouring properties. From schools to industrial businesses, phone towers to social housing, flight paths to disruptive neighbours, some can be identified online but many require a visit to the property.

Buying sight-unseen is one of the worst blunders a buyer can make.

Other due diligence items that can be determined from a thorough site visit include scoping out the age and extent of renovations. In Victoria, vendors are not legally bound to provide paperwork and permits for renovations under a particular dollar value when the renovations have been carried out within the existing roofline. In the absence of an updated floorpan, it can be difficult to discern whether works extend beyond the original roofline, and what the cost magnitude of the works could have likely been.

Last week we averted a problem when our contract review revealed that significant works had been carried out beyond the pre-existing roofline without permits. The implication for our buyer could have been as dire as a ‘show cause’ notice, (where either rectification, an explanation or a removal of the new structure is required). She could have potentially faced fines too.

Not only would this be stressful for a new owner, but it could negatively impact their resale ability too.

Physical due diligence processes also include building and pest inspections. From water ingress to termites, asbestos to structural issues, we have walked away from plenty of properties over the years.

When it comes to hidden items, we target problems that could exist beyond what is stated in the contract. Historical engineering reports on buildings with severe cracking issues, future proposals for hefty special levies, council and water authority orders on a property, and neighbourhood complaints are just some of the concerns we try to identify.

The invisible issues are those that aren’t always in the contract and aren’t always visible at the inspection.

This week we tackled an easement that did appear on the title but showed up in a water authority certificate. An easement can either be an accessway that others are entitled to use, or it could be a section of the property that has an asset belonging to an authority situated on/underneath it.

Easements are normal. Permanent structures built over them without consent can be problematic.

A covenant on a property is a restriction on its use or a restriction on future changes. Overlays, (particularly Heritage Overlays) can also preclude a purchaser from doing something that they had intended to do to the property. Not all buyers know how to interpret easements, overlays and covenants on a title.

And caveats are another legal issue altogether that buyers need to be aware of.

Part of our due diligence process involves us checking planning applications nearby, calling Owners Corporation Managers, ordering council and water rates certificates, checking land tax obligations and confirming VicRoads changes/plans for changes to the road that the property is situated on.

Due diligence also involves us addressing the client-specific potential issues, particularly in relation to finance. If a client’s lending position is vulnerable or high risk, (ie. above 80% and involving LMI, any challenging lender-imposed special conditions), we need to carefully consider the strength of our offer and our method of negotiation to mitigate any risks relating to their ability to obtain the loan and settle the property.

Due diligence takes time, legal engagement, building and pest inspector investment and should also always be followed through with the appropriate insurances, (including Title Insurance).

For any buyer considering proceeding without the appropriate due diligence, they are taking a huge gamble and risking a serious amount of money.