Step 2 to conduct due diligence like a pro

In my last blog I discussed a simplified due diligence process to help you undertake market risk assessment in a more manageable way.

As promised, this blog will set out the due diligence process that you should follow once you have identified a potential investment property.

When get to this point, it’s important not to let your emotions take over. If you’re satisfied with your market due diligence, you may think you’re onto a winner.  But failing to thoroughly investigate the property itself can have dire consequences.

No one wants to find out months into having purchased an investment that it has serious issues which could significantly affect your return. Identifying potential issues will help you avoid buying a dud or it will arm you with the ability to negotiate on purchasing terms.

While your settlement agent will be able to assist with some or all aspects of your property due diligence, it’s essential that you’re aware of what’s required.  It starts with asking the vendor for a copy of the contract of sale.

The contract of sale contains information on what the vendor is offering to sell you – but it’s not always clear and the standard inclusions will vary from state to state. Below is a list of what it may or may not include. Where information is not included, you should source it for yourself, or request that the vendor provide it as a special condition of the contract. What is provided to you by the vendor should be checked for accuracy. Even if you never intend to occupy the property yourself, these factors can affect the property’s value and its tenant appeal.

Your property due diligence check list:

1.     Land survey – Ideally, the sale contract will include a plan of the land, or land survey, (standard in some states) but it many cases it won’t. A land survey is particularly important if you are intending to sub-divide or develop. Lenders also often require an up to date survey.

How to get one: If you haven’t been provided with one, you can source one from the state land authority or, you may need to appoint a surveyor to undertake one.  Even if you are provided with a survey, you’ll need to check that it’s consistent with the actual property and you still may need to appoint a surveyor.

What the survey will provide:

·    The dimensions of the land

·    The location of the property in relation to other houses and cross streets

·    Identification of any easements which may permit a person (usually a government authority) to use your land for running electrical mains or drainage. Easements can affect how and where you build on that land.

·    Identification of any restrictive covenants which may prevent you from using the land in a particular way such as not building above a certain height

2.   Sewer plan – this shows the location of any sewer mains and the property’s connection to them. As with electrical and drainage easements, if your property contains a sewer main, it may affect your use of that land, potentially preventing you from building on it or near it.

How to get one: Your local water authority will be able to provide you with information on your water and sewerage connections and a sewer plan (for a small fee).

3.   Zoning or planning certificate – Zoning information may be included in the contract for sale in the form of a zoning certificate or as part of the Certificate of Title (depending on which state you’re in). It will inform you of what the property can be used for, what planning and development regulations apply and whether it has sub division potential.

How to get one: Your state land authority or local council will be able to provide you with an official record of the property’s zoning for a fee.

4.   Local planning and development documentation – in some states, the vendor will be obligated to provide information from the local council indicating whether any works are planned on adjoining properties, local roads etc which could affect the use and value of the property. It’s also worth checking with the vendor or agent if there have been any problems with the neighbours.

How to get this: The local council will be able to provide you with information pertaining to civil development plans and building approvals in your area.

5.   Building inspection and termite reports – You must ensure that the building’s structure is sound and not affected by termites if the property is located in a problem area. If buying a strata property, providing this information will be the responsibility of the owners corporation.

How to get this: You may be able to request a building inspection report from the vendor using your chosen licensed builder or architect as a special condition of the contract. Alternatively, you can undertake this yourself with your chosen person.

6.   A list of fittings and chattels included with the property – this might seem obvious, but sometimes what the buyer expects and what the seller is offering can vary. Items that can require clarification include carpets, blinds, certain appliances, garden sheds etc. If in any doubt, make sure you check what fixtures are and aren’t included and have these clearly stipulated in the contract.

7.   Additional considerations for strata properties – If you’re looking to buy a property under a strata scheme there is some additional due diligence to be done. You’ll need to find out what strata levies you’ll be required to pay, if the financial position of the strata company is solid, and assess its ability to maintain the property and its building insurance policy.

How to get this: You’ll be able to request all this information from the strata company (owners corporation).

Once you’ve satisfied your market due diligence and property assessment criteria, then it’s time to put in your offer!

NEXT WEEK – How to negotiate like a pro and tip the odds in your favour!

Leave your comment below

Note - comments are moderated and wil not appear on this blog until approved by the author.


Questions

Hi Ryan, im new to property investing but spend all my time researching im very eager to learn, im currently 24 years old and purchased my first investment property in 2011 for 280k.

Me and my fiancée are looking at purchasing a property together within the next year which will be an investment for a year or so but adventually something to move into. I want to make my current propert postive geared before I go ahead any further thou, I have 255k on the mortgage with 70k sitting in the offset account. I get 350 a week rent which results in the property being negative geared but only slightly. Is it a smart idea to use 10k in renovations for a new kitchen which will increase the equity in my property but also the rental yeild to, then use the equity to secure a cheap property for 150k with a rental return off 250 a week, which will be positive geared and use the extra cadh flow to help pay off the first investment, their fore rendering both propertys postive geared, without using to much of my money in my offset account which may be used for future ventures. Any advice or help would be very much appreciated thank you.

Comment by chris08 on July 20, 2014 at 7:42 am

Hi Ryan …. Can you send me last weeks ( Step 1) blog, as I missed it, please. Thank you

Regards
Jackie

Comment by Jackie on September 27, 2014 at 1:15 am