When you are buying a property, it’s very important to understand exactly what you’re getting yourself into. Whether you are buying a fixer-upper or you’re buying a brand new home, doing due diligence is important.
What exactly is due diligence?
If you have never heard of due diligence, fear not. You can view due diligence as an investigation of a matter, which, in this case, would be the property you are considering purchasing. Due diligence starts once you make a conditional offer and both parties sign the contract. For first home buyers due diligence is usually 15 days. This is because first home buyers typically need a valuation because they usually have low equity (less than a 20 per cent deposit).
While due diligence is your responsibility, you should get advice and help from a solicitor and other professionals. Due diligence can be a bit of an intense process that runs on a tight deadline. That’s why knowing the process of due diligence and what it entails is important, so you can get all your ducks in a row before you sign the papers. That is exactly why you need a power team in place when buying a house.
Due diligence gives you the right to cancel if you decide that the property isn’t the right one for you after doing your research or if the bank won’t lend you the money for the property. Essentially, due diligence protects you.
What does due diligence entail?
It is technically up to you what due diligence includes, however, for first home buyers due diligence typically includes the following four aspects:
- Builder’s report
- LIM report
- Solicitor’s approval
Naturally, you also need to do informal research such as looking at the community, schools in the area, distance to work … However, these should all be done before you make a conditional offer, so in this post we assume you have already done all of this, so we can focus on the more formal part of due diligence.
Let’s take a closer look at each of these four aspects.
We highly recommend that you get a building inspection, no matter the age of the house. It would be a real bummer to find out the roof needs replacing, the electricity is installed wrong or similar after purchasing the property. With a builder’s report you know what you’re getting yourself into before you buy the house. It doesn’t mean you shouldn’t buy a house just because the roof needs replacing in five years, however, you need to know if you have the money to do so.
Therefore, it is highly recommended that a building inspection is in your list of offer conditions. If the inspector finds any issues you can then cancel your offer or revise it. You can also consider a meth test, which will identify any illegal use of the property and provide options for remedy.
You also need the LIM (Land Information Memorandum) report. This is a report from the Council which contains information that it holds about the property. For instance the LIM report could include rates information, information about stormwater and sewerage drains, land features, and building and resource planning consents. The real estate agent might already have the LIM report. Otherwise you can get the report from the council. Please note that you will need to pay a fee to obtain the LIM report. The LIM report will help you understand if the property meets the council’s standard and has a code of compliance.
First of all, you really should get a pre-approval before you start house shopping. This means that you are in a much better position to make an offer once you find your dream home. But, in your list of conditions you should include that you can cancel the offer if the bank won’t lend you the money. Once you put in an offer and you sign the contract, you need to send it to the bank straight away. Getting the bank’s approval can take a few days so ensure you do this right away.
As mentioned earlier, most first home buyers will need a valuation before the bank approves your loan. Basically, the bank wants to know that you are not overpaying for the property, especially if you have low equity which most first home buyers do.
It is highly recommended that you discuss the contract with a solicitor. By ensuring you include your solicitor’s approval in your list of conditions, you can cancel the offer if your solicitor is unhappy with the LIM, title, or the contract. The solicitor reviews and negotiates the Sale and Purchase Agreement (the contract), and he/she also reviews the title and LIM report. We don’t recommend that you try reviewing the contract on your own as it includes a lot of jargon, and you most likely won’t know what to look out for. Better to leave it up to a professional.
Well, if everything is spotless and everyone is happy, you can make your offer unconditional and thereby making the offer legally binding. You will then pay the deposit, and voilá you just purchased your first home.
Everything shared in this blog post is general financial advice. For financial advice tailored to you, please book a meeting with us.