It is not uncommon for a purchaser to fall in love with a property, rush through the proper checks and then discover something later that should have been identified before signing the contract.

Whether it is unapproved works, unexpected structural repairs, legal restrictions or proposed special levies, failing to carry out the necessary checks can result in costly and unwelcome surprises.

Carrying out proper due diligence on a property and asking the right questions before entering into a contract is therefore a vital step in protecting your interests.

In this article, we explore what due diligence means in the context of a property transaction, why it is important and some of the key checks and investigations purchasers should consider before committing to a property purchase.

What is due diligence and why is it important before purchasing property?

Due diligence is the process of thoroughly investigating a property and assessing its legal, physical and financial position before committing to the purchase.

A quick inspection or walk-through of a property will rarely reveal the full picture. There may be issues affecting the title, planning restrictions, unapproved works, structural defects, compliance concerns, strata disputes, proposed special levies or significant future costs that are not immediately apparent.

Identifying these issues before entering into a contract gives a purchaser the opportunity to:

• Understand the risks associated with the property.
• Investigate any issues further.
• Negotiate the purchase price or contract terms where appropriate.
• Make an informed decision about whether to proceed.
• Avoid being locked into a purchase that may carry unexpected costs or restrictions.

This is particularly important where a property is being purchased at auction in NSW, or on the same day as an auction after the property has passed in, as generally no cooling-off period will apply in these circumstances.

What due diligence should be carried out before purchasing a property?

There are a number of investigations a purchaser should consider before entering into a contract to purchase property.

Some of the key areas of due diligence include:

• Legal due diligence.
• Physical due diligence.
• Financial due diligence.

The appropriate searches and investigations will depend on the nature and location of the property, as well as the purchaser’s intended use of it.

Legal Due Diligence

It is crucial to have a property lawyer or conveyancer review the contract for the sale of land and investigate the property’s legal position before you become legally bound.

A legal review can assist with matters such as:

• Confirming property ownership.
• Negotiating contract conditions, seeking to ensure they are fair and reasonable, and identifying potential risks.
• Identifying issues such as easements, covenants, caveats or unresolved ownership disputes.
• Assisting with the interpretation of dealings, zoning certificates and property certificates.
• Identifying any outstanding notices or restrictions affecting the property.
• Explaining the purchaser’s rights, entitlements and obligations under the contract, including important deadlines and conditions.

Physical Due Diligence

Physical due diligence involves investigating the condition of the property and identifying physical risks that could result in significant costs to the purchaser.

There are several investigations a purchaser may wish to consider.

Building and Pest Inspection

A building and pest inspection provides an assessment of the property’s condition at the time of inspection.

A building inspection will generally involve a visual assessment of accessible areas to identify apparent defects or issues. These may include cracking, water damage, defective building elements, poor workmanship and roofing issues.

A pest inspection may identify evidence of termites, timber pests, timber decay or other pest-related issues.

Obtaining an independent and thorough building and pest report is an important part of the due diligence process and can assist in minimising the risk of unexpected issues and costs.

Strata Report

If you are purchasing a strata property, such as a unit, apartment or townhouse within a strata complex, obtaining a strata report can provide valuable insight into the financial, physical and legal position of the strata scheme.

A strata report can assist in identifying matters such as:

• The property’s unit entitlement, including its relevance to levies, special levies and voting rights.
• The Owners Corporation’s financial position, including its administrative and capital works funds.
• Current and proposed strata levies.
• Insurance and other compliance matters.
• Minutes of Owners Corporation and Strata Committee meetings.
• Current or previous disputes and legal proceedings.
• Building defects and significant maintenance issues.
• Proposed works or expenditure that may result in future costs for lot owners.

Before You Dig Australia Search

If you intend to undertake excavation, construction or development works on the property, a Before You Dig Australia (BYDA) search can help identify underground or overhead infrastructure in the vicinity of the property.

The search provides information about infrastructure and services that may not be visible from the surface, such as powerlines, substations, telecommunications infrastructure and drainage pits.

Identifying the location of these services before undertaking excavation can help avoid damage, delays and potentially significant additional costs.

Compliance and Certification

Depending on the property, additional compliance checks may also be appropriate.

For example, properties containing swimming pools should be investigated to determine whether the pool has the required compliance documentation and whether there are any outstanding safety or certification issues.

Other properties may warrant investigations into matters such as fire safety, building certification, occupation certificates or other regulatory requirements.

The appropriate checks will depend on the property itself and how you intend to use it.

Financial Due Diligence

Financial due diligence involves confirming that the purchase is financially viable, including securing appropriate finance and understanding the additional costs and ongoing expenses associated with owning the property.

In NSW, contracts are not typically subject to finance, so it is important for purchasers to ensure their finance arrangements are in order before entering into a contract.

It is also important to budget for costs beyond the purchase price, including:

• Stamp duty or transfer duty.
• Legal fees.
• Rates and taxes, including council and water rates, land tax and strata levies where applicable.
• Lender costs and associated fees.

Understanding the full cost of purchasing and owning the property can help ensure the purchase remains financially manageable.

The Importance of Property Due Diligence

Performing comprehensive due diligence is one of the most important steps in the property purchasing process. It enables purchasers to identify potential risks and make informed decisions before entering into a contract.

By undertaking the appropriate searches and obtaining professional advice prior to exchange, purchasers can seek to minimise unexpected costs and strengthen their negotiating position.

If you’re preparing to buy a property, we’re here to help.

Contact us by email at e.mouawad@hfklawyers.com.au or j.koukouras@hfklawyers.com.au, or call (02) 9307 8900 to discuss your plans and how we can support you.