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Test the Depth Before You Jump In

Published: 14th April 2016

Author: Nic Popham, Cruickshank Pryde

Published in: Property e.Speaking | Issue #21

Always do due diligence

It‘s standard to test drive a vehicle before you buy it, so it‘s equally as important that you also do your homework on a property before you sign up. ‘Due diligence’ is a term that means investigating and researching everything about a matter before entering into a contract. Completing thorough due diligence is likely to lessen the chances of any nasty surprises coming to light after settlement, saving you a lot money and hassle in the long run.

Take your time

If you don’t have time to investigate a property before putting in an offer, ask the agent to insert a due diligence clause into the agreement. This will give you time to ensure that the property is suitable for you in all respects, as well as giving you the ability to cancel the agreement if you discover anything untoward about the property within the due diligence period.

There’s no reason why due diligence cannot be completed within five working days. In the current sellers’ market, however, this may not always be possible. Some vendors may prefer a ‘cleaner’ offer with fewer conditions, even if it’s a lower purchase price. If this is the case in your situation, give us a quick call to discuss your options before signing the agreement.
Completing due diligence is particularly important if you are looking at buying a property at auction, as it is of course an unconditional purchase. We often see clients spend time and money on due diligence only for the opening bid to exceed their limit. Spending money before rushing into a contract, however, may save you a larger unexpected bill in the future.

What to look into

When doing due diligence of a property, we recommend assessing the following factors:

  • Land Information Memorandum (LIM): Review the LIM to ensure that all necessary consents for the dwelling, garage, and any alterations have been applied for, and the relevant certificates have been issued.
  • Builder’s report: Have a qualified builder inspect the property to make sure it’s structurally sound, watertight and free of any major defects that could cost you thousands to fix. (There’s more on the importance of a builder’s report in Property Speaking Autumn 2015.)
  • Title review: Check all easements, covenants and other registered interests.
  • Finance: Even if you have pre-approval from your lender, it’s best to get written confirmation of finance sufficient to complete the purchase, with your lender approving the property as security.
  • Insurance: In Property Speaking Spring/Summer 2015 there’s a story that stressed the importance of getting confirmation that the property is insurable. Your lender will not advance you the funds to settle if there’s no insurance over the secured property.
  • Valuation: Make sure you’re not overpaying or over-capitalising. Your lender may require this too.
  • Lease/tenancy: Review the terms of the current lease/tenancy agreements in place for the property to ensure viability and future obligations. Getting a rental appraisal should also be considered to determine the current market rent.
  • Council District Plan: Make sure your intended use for the property is allowed under the District Plan, or resource consents may be needed.
  • Council property file: Remember the council only knows what it has been told, so check to see if this matches up with what is actually on site.
  • Local area: Take time to check out the neighbourhood where the property is situated. The area may experience different sounds and smells that you wouldn’t know about after a 20-minute visit. You may wish to check with the council about any upcoming projects in the area that may affect its character.
  • A methamphetamine test: Unfortunately it’s more common than you think.

Whether it’s your first home or another addition to your investment portfolio, purchasing a property is a huge commitment – so it pays to do it right. Conducting due diligence and contacting us at the earliest opportunity will help to ensure your new property will meet your expectations.

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  • Nelson
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  • Waikato
  • Wairarapa
  • Wellington
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