Finding a property you love is one thing. Making sure you understand what you’re buying is another. Before committing to a property purchase in NSW, there are a number of checks that can help you uncover issues that are not necessarily obvious at an inspection. This process is referred to as due diligence.
Due diligence is not one single search or report. It can involve reviewing the contract and title, investigating restrictions affecting the land, obtaining building and pest reports, reviewing strata records and considering whether the property is suitable for what you intend to do with it. Here’s what buyers should know.
What does due diligence mean when buying property?
Due diligence is the process of investigating a property before you become legally committed to buying it. A property might look perfect during an inspection but still have legal, financial or physical issues that are not immediately apparent. For example, there may be:
- An easement affecting part of the land;
- Restrictions on how the property can be used;
- Significant building defects;
- Termite damage;
- Issues recorded in a strata scheme’s records;
- Planned major works or special levies in a strata scheme; or
- Contract terms that create additional obligations or risks for you.
The checks that are appropriate will depend on the type of property you are purchasing and your individual circumstances.
1. Have the contract reviewed
One of the first steps when you are considering the purchase of a property should be to obtain a copy of the contract for sale. In NSW, the contract contains the terms and conditions of the transaction, and important information and documents relating to the property. Your solicitor or conveyancer can review the contract and explain matters such as:
- The deposit and settlement arrangements;
- Inclusions and exclusions;
- Special conditions;
- Title information;
- Easements, covenants or restrictions disclosed in the contract; and
- Other terms that may affect your purchase.
If something needs to be amended, it may also be possible to negotiate amendments with the seller before contracts are exchanged. For more information about reviewing a contract before committing to a purchase, read our guide to Buying Property in NSW, What to Check in the Contract Before You Sign.
Watch: The Property Brief
Understanding what you’re buying involves more than inspecting the property. In this episode of The Property Brief, Southern Waters Legal’s Stephanie Martyn and Mario Ferraro discuss the importance of due diligence and the checks buyers should consider before committing to a purchase.
2. Understand the property title
The title can tell you important things about the land you are considering purchasing. Registered interests affecting the title can include easements, covenants and restrictions on the use of land. An easement, for example, may provide another person or an authority with rights over part of the property. Depending on its location and terms, this could affect where you can build or how you can use and enjoy part of the land.
If you have plans for the property, such as extending the property, adding a pool or undertaking a substantial renovation, it is particularly important to understand whether there are legal restrictions that could affect those plans. A property lawyer can explain the title documents and identify matters that may warrant further investigation.
3. Consider planning and council information
You may also need to consider how the land is zoned, what planning controls apply and whether there are matters affecting how the property can be developed or used. The contract for sale of a NSW residential property contains prescribed documents, including planning information. However, depending on your intentions for the property, you may need to make further enquiries.
If you are purchasing and intend to renovate, extend, rebuild, subdivide or otherwise develop the land, do not assume that your plans will automatically be permitted. Obtaining appropriate advice before committing is particularly important when your intended future use is a major reason for purchasing the property.
4. Arrange a building inspection
A contract informs you about the legal transaction. It does not provide details about the physical condition of the building. A pre-purchase building inspection can identify significant defects or problems such as cracking, rising damp, safety issues or roof defects. This can give you a clearer understanding of the property’s condition before you decide to proceed.
There are limitations to what a standard building report covers. Some areas may not be accessible, and matters outside the inspector’s expertise or scope may not be included. For this reason, if something particular concerns you about a property, ask the inspector whether it is covered by their report and whether further specialist advice is required.
5. Don’t forget the pest inspection
A building inspection and a pest inspection are not necessarily the same thing. For example, a building report may identify visible damage caused by termites, but it may not establish whether termites or other timber-destroying pests are currently present. A separate pest inspection can therefore be an important part of due diligence, particularly for houses and properties in areas where termites are a known issue.
Discovering a problem does not automatically mean you should not purchase the property. Being aware before you commit to the purchase puts you in a much better position to make an informed decision and engage in the appropriate negotiations with the seller.
6. Buying an apartment or townhouse? Review the strata records
If you are purchasing in a strata scheme, there is another layer of due diligence to consider. When you buy a strata property, you’re not only purchasing your individual lot. You also become part of a scheme with shared property, financial obligations and rules. A strata search report can provide important information about the scheme, including:
- Its financial position;
- Insurance;
- Building defects;
- Planned works;
- Meeting minutes;
- Existing or pending legal matters;
- Disputes within the scheme; and
- Other matters recorded by the owners corporation.
You should also consider the scheme’s by-laws and levies. For example, a low quarterly levy might initially look attractive, although it is worth understanding the financial position of the scheme and whether significant expenditure or special levies may be on the horizon. The strata plan is also important because it helps establish what forms part of your lot and what is common property.
7. Consider how you intend to use the property
Due diligence should not only ask “Is there anything wrong with this property?” It should also ask: “Is this property suitable for me?” Your priorities might include:
- Renovating or extending;
- Installing a swimming pool;
- Operating a business from the property;
- Keeping pets in a strata scheme;
- Leasing the property;
- Adding a secondary dwelling; or
- Redeveloping the site in the future.
Different legal, planning and strata considerations can arise depending on your intentions. If a particular feature or future use is important to your decision to buy, raise it with your property lawyer before you commit.
8. Make sure your finance is in order
Legal due diligence and financial preparation often need to happen at the same time. Conditional or pre-approval from a lender is not the same as unconditional approval. Your lender may still need to complete its own valuation and assessment before confirming unconditional finance. This is particularly important if you are being asked to exchange contracts quickly or waive your cooling-off rights.
Your lawyer advises on the legal transaction, while your lender or mortgage broker can advise you about your finance arrangements. Both pieces need to work together before you commit.
When should you complete your due diligence?
Ideally, any investigations should be completed before you sign a contract. For a private treaty sale, a statutory cooling-off period may provide some additional time after exchange in many residential transactions. However, withdrawing during the cooling-off period can result in the buyer forfeiting 0.25% of the purchase price.
There is also no cooling-off period when purchasing at auction. That makes timing particularly important. If you’re planning to bid at auction, you should consider completing your contract review, finance arrangements and appropriate property investigations before exchange (whether by private sale or auction). If you are the successful bidder, you will generally be required to sign the contract and proceed with the purchase.
What if a problem arises during due diligence?
Finding an issue does not necessarily mean the purchase cannot proceed. The significance of the issue and your available options will depend on what has been discovered and when. Depending on the circumstances, you might decide to:
- Proceed with the purchase as planned;
- Obtain further information or specialist advice;
- Seek a change to the contract;
- Negotiate with the seller;
- Reconsider the amount you are prepared to purchase the property for; or
- Decide the property is not right for you.
What you can legally do will depend on whether contracts have been exchanged, the terms of the contract, whether any cooling-off rights remain, and any due diligence you have completed. This is one reason why carrying out due diligence early is crucial.
Is a building and pest inspection enough?
Not necessarily. Building and pest reports investigate aspects of the property’s physical condition. They do not replace legal due diligence. Likewise, having the contract reviewed does not tell you everything about the physical condition of a building.
Satisfactory property due diligence can involve several professionals looking at different aspects of the purchase. Depending on the property, that may include your solicitor or conveyancer, building and pest inspectors, lender or mortgage broker and, where necessary, other specialists.
Due diligence can help you buy with greater confidence
Buying property is a significant financial commitment, and no due diligence process can guarantee that you will never encounter an issue. It does, however, provide you with more knowledge about the property before you become committed to buying it. This allows you to ask questions, investigate concerns and make your decision with more information in front of you.
Buying property in NSW?
Whether you’re purchasing your first home, an investment property or preparing to bid at auction, understanding the legal considerations before committing to a purchase is an important step.
At Southern Waters Legal, our Property Law team can assist with reviewing contracts and title documents, advising on relevant property searches, negotiating contract terms and guiding you through to settlement. Considering buying a property? Contact our Property Law team before you sign or bid.
This article provides general information only and does not constitute legal advice. The appropriate due diligence will depend on the property, transaction and your individual circumstances.
