How to do Due Diligence
As a property investor you need the skills to analyse a property and ensure that what you see meets your expectations and the outcome you are after.
This can all take time and each property requires various levels of investigation. In saying that, there are similar high level actions you should check off on all properties.
When you find a property that looks interesting and has the potential to meet your needs, I always recommend getting it under contract as fast as you can. Sometimes this is not possible if the sale is by Tender or Auction, but if you are able to negotiate a price, get it under contract. This is so you can take control and no one can take the opportunity away from you until you have completed your due diligence within your conditional period, or the conditional period expires.
If possible, I always add a general due diligence clause to the conditions of the Sale & Purchase Agreement, which is extremely "open" and allows you to pull out of the purchase for any reason. Rather than stating clauses such as, engineers report or suitable finance clause, I stick to the generic due diligence clause that all real estate agents have access to. I try for at least 10 days but sometimes that is not possible. Work with the agent and vendor to agree on both a mutually acceptable price and terms.
Once under contract you can now start your investigations; the more you can do, the less risk will be involved in the outcome. Some free options available to you are:
- Viewing the local councils public records to ensure everything is consented
- The council will hold a public file about the property, so looking at what is on record is a good start to ensure that what you saw at the property is what the official records hold and everything is consented and as expected.
- Getting your own rental appraisal
- Important to know if you intend to rent the property out. Go to a professional rental company that you intend to use if you are successful in purchasing the property.
- Obtaining rental agreements and proof of rent
- The vendor or agent should be able to provide a copy of the current tenancy agreement/s so you can understand if they are on a periodic or fixed term tenancy. If fixed, you will not be able to take vacant possession. You will also want to see proof of the rents being paid on time.
- Talking to the tenants (if rented)
- Gain an understanding of whether they like living there and what they find missing or lacking from the property.
- Talking to the neighbours
- You can uncover a lot about the property and the area by talking to the neighbours and introducing yourself as the potential new owner.
- Driving around the area and going back to the property at night or in the weekend
- Get a better feel of the area and the street if you are unfamiliar with it.
- Getting a builder you know to take a look around the property for you
- A full building inspection can cost around $1,000 so if you are quite confident and know a good builder, they may be able to take a look and advise you on any potential issues they can see. You could still order a full builders report, but this is a great start and can identify any “show stoppers” early in the process without spending money (maybe only a few drinks!). Be careful not to take your builders time for granted.
- Obtaining finance
- Even though you may have pre-approval, that is in no way a guarantee that the bank will lend on the property you have under contract, so make sure you go back to them with all the information you have gathered and ensure you can obtain finance on terms suitable to you.
- Rates and Insurance
- Check the council website to confirm the rates for the property and also contact your insurance company (or Broker) to get an insurance quote. This will assist you in doing the financial analysis on the property.
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Other Due Diligence will cost you money and time so ensure you prioritise your expenses based on the time of the conditional period and investigating your main concerns first. You could organise the following:
- Order a LIM (Land Information Memorandum) - Budget $400
- Ordered from the local council, this will give you a lot of information about the land and also any outstanding building consents. You will also get information about the property that you may want to go to the council archives to investigate further. This can take up to 10 working days to arrive.
- Ordering a PIM (Project Information Memorandum) - Budget $400
- Ordered from the local council, a PIM holds all information of any building work that required a Building Consent, but can take up to 20 working days.
- Getting your lawyer to investigate the Title and check the Sale & Purchase Agreement - Budget $1,000 for complete purchasing transaction
- You need to ensure the property title is what you are expecting in terms of easements, caveats and encumbrances. Is it Freehold or Leasehold land? Are there any road reserves that require additional annual council fees?
- Organise a building inspection - Budget $1,000
- Provides a detailed inspection report of the property including water tightness readings. Some companies also provide cost estimates to rectify issues. Always expect issues to be uncovered with ANY property.
- Engineers report - Budget $1,500
- If the property is situated on suspect land, or a slope, or is two stories or more, you may want to consider an engineers report to ensure the foundations and major structures, such as balconies and decks, are up to current code requirements and if they're not, how much will that cost?
- Geotech report - Budget $1,000
- If the property is situated in an area of suspect land you may want to consider a report to identify the suitability of the land under and around the property.
- Obtain quotes for doing any building work
- If you are planning any renovation, then this is the time to start the budget for all the additional work to ensure the end result works out as expected. This should include the timings of when the builder can start and finish.
- Methamphetamine "P" Test - Budget $400
- Arrange for “P” test to ensure the property is not contaminated.
- Getting a Registered Valuation - Budget $700
- This can give you piece of mind that you are not over-paying for the property. Never tell the valuer what you have the property under contract for! You could also talk with them to get an idea of the value of the property once you have completed your renovation and/or what the new rent could be.
This is in no way an exhaustive list of actions but will certainly go a long way to reduce your risk and ensure what you are buying is exactly what you are expecting.
If you uncover issues that you weren’t expecting or are costing a lot more than expected, you still have the ability to negotiate with the vendor by way of a reduced price to compensate, or ask the vendor to fix the main issues that you uncovered. Failing that, you have the option of pulling out of the contract and moving onto the next deal, knowing that the money you spent on the due diligence was well worth it and would have saved you thousands of dollars if you hadn't done all your homework.
If you do go unconditional, it is time to plan all the things you want to put into action when you finally take possession…. good luck and happy investing!
Due Diligence can be a hectic time and it is important to know how much time you need before you start. It is a good idea to have loan pre-approval in place before you make any conditional offers on a property as banks can be slow to respond at inopportune times.
Depending on the property you may need to do other checks. iFindProperty is able to help an investor do comprehensive Due Diligence on a potential purchase and can arrange, on your behalf, almost all of the above Due Diligence checks along with others that may be required.
Peter left his corporate job in 2014 to focus on property and spend more time on his passion of mountain hiking and landscape photography. He joined iFindProperty the following year in the Wellington region and runs a highly respected property mentoring program.
To contact Peter about working one-on-one with him in a coaching capacity please email him here. His student numbers have grown quickly and there are limited spaces available.