What is Due Diligence When Buying Property?

Buying a home is likely one of the largest financial transactions you will make. When you find the ‘right’ property, it’s easy to get caught up in the excitement. However, before signing a contract, it is essential to conduct due diligence when buying property.

Due diligence when buying property involves investigating and evaluating a property. It ensures you understand exactly what you are buying. This process protects against expensive surprises, such as hidden structural defects, unapproved building work, or legal restrictions that may affect your use of the land.

Due diligence typically covers three areas: physical, legal, and financial. Getting it right can make the difference between a sound investment and a potential nightmare.

Due Diligence Area	Focus
Physical	Building and pest inspections, strata reports, and pool compliance.
Legal	Contract reviews, title searches, easements, and council approvals.
Financial	Unconditional finance approval and accounting for hidden costs.

1. Physical Due Diligence: Inspecting the Property’s Condition

You cannot rely on a quick walk-through during an open house. Professional and objective assessments are necessary.

In many jurisdictions, building and pest inspections are not mandated. Nevertheless, they are strongly recommended for prospective purchasers. Because laws and regulations vary, check the specific requirements in the state or territory where you are buying.

If the house has a swimming pool, you may also need a compliance certificate. Again, check the relevant legislation and requirements in your area. For strata properties (units or townhouses), a strata inspection report is essential. Drainage diagrams, even if not mandatory, are also advisable.

Building and Pest Inspections

• Building report: A qualified building inspector checks for major structural defects. Examples include cracking, roof issues, faulty drainage, rising damp, or poor workmanship.
• Pest report: A pest inspector looks for timber-destroying pests, mainly termites (white ants). They check for active infestations, past damage, and conditions that may cause future attacks.

To protect your interests, ensure the contract contains a building and pest clause. This clause should make the purchase conditional on satisfactory inspections. Always confirm this with your conveyancer or property lawyer.

Strata Reports

Inspecting the records and associated documents of a strata scheme provides key information for strata properties.

• Financial health: A strata report examines the body corporate’s financial records, including the sinking fund (money saved for future major repairs like roofing or lift replacement) and the administrative fund. A low sinking fund could mean a costly special levy soon after you move in.
• Maintenance issues: The report reviews meeting minutes. It identifies major structural or maintenance issues, such as concrete cancer or leaky balconies, that are reported but not yet fixed.
• By-laws and disputes: By-laws govern strata property, including pet ownership, noise restrictions, or renovations. Reports reveal any history of disputes between residents.

2. Legal Due Diligence: Checking the Title and Contract

Legal due diligence always involves reviewing the contract of sale with a licensed conveyancer or property lawyer. You should also conduct a title search to confirm legal ownership. Furthermore, check for easements, covenants, and caveats. Zoning and planning overlays must be confirmed. Additionally, all structures, like renovations, decks, and carports, should have council approval. Unapproved works become the buyer’s responsibility after settlement.

Reviewing the Contract of Sale

Your conveyancer or lawyer reviews the contract, including general and special conditions. Special conditions often protect the vendor. Your lawyer ensures these conditions are fair. They may request amendments if necessary.

Title Search and Ownership

A property title search discloses:

• Ownership: Confirms that the seller is the legal owner and can sell the property.
• Easements: Shows if another party has a right to use part of your land, such as for drainage or a shared driveway. This can limit future development.
• Covenants: Rules or restrictions imposed by a previous owner or developer limit land use or development.
• Caveats: Confirms if another party has lodged a formal claim, potentially blocking the sale.

Council Approvals and Zoning

Ensure all structures are legal. Verify the property can be used for its current and proposed purposes.

• Building approvals: Check with the local council for any renovations, extensions, decks, or carports. Unapproved work becomes your problem after settlement.
• Zoning: The property’s zoning defines allowed uses, such as residential, commercial, or industrial. This flags restrictions on future development.

3. Locational and Financial Due Diligence

External factors can affect long-term enjoyment and property value. Investigate these carefully.

Neighbourhood and Development Checks

The property exists within a community. Learn about your surroundings.

• Visit at different times: Check the street and neighbourhood during the day, evening, and weekends. Look for traffic, parking, and noise issues.
• Council planning: Review local council websites for nearby development applications. A block of flats next door or a major road upgrade can affect your view and peace.
• Natural risks: Investigate susceptibility to bushfires, floods, or other hazards. This influences insurance costs and availability.

Financial Assessment

Understand your loan approval and conditions. Factor in all costs to align the purchase with your budget.

• Unconditional finance: Obtain formal loan approval before contracts are binding. Pre-approval is not enough. Ensure approval before the finance deadline.
• Hidden costs: Include stamp duty, mortgage fees, conveyancing fees, insurances, council rates, and strata levies.

Next Steps for a Safe Property Purchase

Completing due diligence requires advice from the right professionals. A methodical approach allows you to negotiate effectively, walk away from a bad deal, or proceed with confidence.

This is general information only and does not constitute legal advice. Property laws differ between states and territories. Buyers should seek professional advice tailored to their location, property, and circumstances.