Purchase Due Diligence

Questions about purchase a property?
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After you have entered into a Contract for Sale to buy a property you have very few remedies if the property is not as you expected it would be. Even if you do have remedies, the cost of enforcing them will be significant, and certainly far greater than the cost of making appropriate investigations before you enter into the Contract for Sale.

After you have decided the practicalities of whether the property meets your requirements as to size, location, facilities and budget, you are ready to proceed with your further due diligence.

Your lawyers can help you with many of the matters referred to below but there are some that only the buyer can investigate.

You should always ask the agent or seller for a copy of the Contract for Sale, as it contains the details of what the seller is offering to sell to you.

What property are you buying?

You will find that there is attached to the Contract for Sale a copy of the plan of the land. Plans are not always easy to read, especially if the property is strata title. As far as possible, you need to check that the property you have inspected is the same as that on the plan. To do this you may need to consider obtaining an identification survey. A surveyor will go to the property and prepare a plan which will:

• show the dimensions of the land,
• identify the location of the property in relation to other houses and cross streets, and
• confirm that the building is properly sited on the land so that the Council would not require any part of the building to be demolished.

Lenders often require an up to date survey.

What do you intend to use the property for?

You must make sure that you can use the property for your intended purpose. You can do this by either checking the zoning certificate (Section 149 Certificate) in the Contract for Sale or by speaking to the town planning section at the local Council. If the zoning requires development approval from the Council you must ask the Council what its requirements are for approval and what conditions the Council may impose on any approval.

What is happening in the local area?

If there is any possibility that there may be developments in the area that could affect your use of the property, for example new buildings, resumptions, roads or subdivisions, you should check with the local Council whether there are any proposals that might affect you. You are the only person who can make this decision.

On occasions, people move because of unpleasant neighbours. It is not always easy to check this out, but you should always ask the agent why the owners are selling.

Check what you are buying

Generally there is no doubt as to what is included in the sale. However, there have been cases where the buyer expects the property to be in a particular condition, or for some items to be included, which are different to what the seller is actually offering. If the property has defects, or the swimming pool is not maintained, or if it is a new property with new appliances, or there are particular items that the seller wants to remove, you should make sure that all of the relevant matters are included in the Contract for Sale and that they have not been excluded by the seller.

A sale of a property includes all "fixtures", which are items attached to the property or part of the structure. If there is any doubt about whether an item is a fixture or not it should be specifically referred to as being included in the sale. Items such as the stove, light fittings, blinds and carpet are usually specifically referred to ensure that there will be no doubt that they are to be included. If you think that other items, such as machinery, a garden shed or pot plants, should be included you should ensure that those items are included in the contract.

Statements by the agent or seller

You cannot rely on anything said by the agent or by anyone else unless it is in the Contract for Sale . If any promise or offer has been made to you, you should ensure that it is included in the Contract for Sale.

Strata Title

If you are buying a unit, either a residential unit or a commercial unit, the property will be administered by the owners corporation (also called the "Body Corporate") in accordance with its obligations under the Strata Schemes Management Act 1996. You will be required to pay levies to the owners corporation to contribute to the management of the building and grounds.

It is essential that you arrange to carry out a search of the books of the owners corporation to find out what the levies are that you will be paying, its present financial position and what amounts it may have set aside for future maintenance. Also, the minutes of the council of the owners corporation should indicate whether there are any problems with the building, or disputes among the owners.

The Owners Corporation is required to insure the building and to take out policies for public liability and, if necessary, workers compensation. The strata search will show the current insurance position and we will check before completion that the insurances are current. However, you cannot delay completion if the insurance is not in place. You should arrange insurance for contents of the unit and your own public liability policy.

The condition of the property

You must satisfy yourself before you become committed to the purchase that the property is sound and fit for occupation. After you exchange the Contract for Sale it is too late to object should you discover physical defects. Some purchasers are happy to satisfy themselves from their own inspection, while others would prefer that a building expert look at the property. You can obtain a building report from a qualified builder who should identify any defects in the property such as poor quality work, unfinished work, dampness, pests, or neglected maintenance.

The builder could also recommend whether an application should be made to the local Council for it to inspect the property and to issue a Building Certificate to the effect that:

• the Council has not found any defects which would entitle the Council to order that the building be demolished, or
• the Council does not require any structural alterations to the building to make it comply with Council requirements.

In areas where termites are active you should also have the property inspected by a pest exterminator.

Home Building Act insurance for residential properties

If any substantial work has been done to the property in the last seven years the work should be covered by insurance against defective materials and workmanship under the Home Building Act 1989. It is possible to make enquiries and obtain certificates confirming that the insurance is in place. If you find out after you enter into the Contract for Sale that the work was not insured then you will not be able to get out of the Contract.

Sewer connections

The Contract for Sale will normally include a plan showing the location of any sewer mains, and the connections from the buildings to the sewer. If you plan to carry out any extensions to the buildings that may go close to or over the sewer you should be aware that the building costs may be increased substantially, or you may not get building approval.

Stormwater

It is not possible to obtain plans which show the location of the stormwater pipes. In most cases, stormwater drains to the street without any problem. However, if the stormwater drains through pipes running through an adjoining property the owner of that property could possibly require the stormwater pipes to be disconnected or ask you to pay for an easement, that is, a right to instal pipes in their land. The most common problem which arises is where you might wish to extend the building and the Council will not approve the extension unless an easement is obtained from the adjoining owner or a detention pit with pump-out is installed. If this might be of concern to you a building report should be able to give some indication as to whether a problem might arise.

On rare occasions stormwater pipes are illegally connected to the sewer. If the water authority discovers that they are illegally connected it will require you to carry out rectification work. Unfortunately, it is not easy to investigate whether or not they are illegally connected, although a plumber may be able to help you if you wish to investigate this.

Parking Levy

Properties in certain Sydney commercial areas such as Sydney CBD, North Sydney, Milsons Point, Bondi Junction, Chatswood, Parramatta and St Leonards are liable for payment of a parking space levy which is collected by the Office of State Revenue. The levy is not payable in respect of resident's parking spaces. You should check with the Office of State Revenue (www.osr.nsw.gov.au) to see if you will be liable to pay the levy.

Deposit

Once you have agreed on a price you will need to budget for payment of the deposit. The deposit is normally 10% of the purchase price, however it is relatively common for sellers to agree to a 5% deposit.

Finance

Before you enter into the contract you will need to be sure that you have sufficient funds to pay for the property. This means that if you are obtaining finance for the purchase you must ensure that you have a satisfactory approval from the lender before you become formally committed to the purchase.

Duty

In most cases you will have to pay duty (formerly called "stamp duty") and you will need to factor that in your financial arrangements. The amount of duty will depend of the price you pay.

Between exchange and completion

The Contract for Sale will be formally entered into when the copy of the Contract for Sale that you sign is exchanged with a copy signed by the seller. There will then be a period of time before completion which is the time when you pay the balance of the purchase money and the seller transfers the title to you. In that period we obtain various certificates from government authorities and make all necessary enquiries to ensure that you will get good title to the property.

During this period you will sign the loan documents with your lender if you are borrowing money.

Swimming pool

If there is a swimming pool on the property it must comply with the fencing provisions in the Swimming Pools Act. If the pool does not presently comply then you as owner would be required to make sure that the necessary fences are erected. It is possible to apply to the Council for a Certificate that the pool complies with the requirements of the Act.

Can you enter into the Contract for Sale and then carry out due diligence?

The buyers of residential properties normally have a five-day cooling off period in which they can make most of the investigations that we have referred to above. However if you enter into the contract with a cooling off period, and you do not proceed with the purchase, you will lose .25% of the agreed price. This does not apply if you purchase at auction or if the seller’s lawyers requires your lawyer to sign a certificate to the effect that you waive your cooling off rights.

Now have a look at our Purchasing a Property quick summary.

Questions about purchase a property?
Contact Q%91%B2%E3%AA%CD%83%B5%DA%BC%DA%CE%A9%C5%DE%9D%90+61 2 9267 9800