Home Buyer: Why due diligence is important

Whether it’s almost brand-new or a fixer-upper, you want to know what you’re getting in to. Undertaking due diligence is a good way to do this as it gets you independent opinions from experts.

Due diligence is an investigation of a matter, usually undertaken before signing a contract. In this case, it’s investigating a property before purchasing it.

As part of your due diligence, there are some formal reports you can purchase, as well as some informal enquiries you can make.

It’s your personal responsibility to carry out this due diligence, but your lawyer can help you if you request (keep in mind that they’ll likely charge for these services). There are also some aspects that the real estate agent may also be able to help with.

You’d carry out the informal aspects of due diligence (like looking at the ease of public transport) before picking an area to live in. Then soon after you decide you like a property, before putting in an offer, it’s a good idea to re-address these factors.

You can also ask the real estate agent for copies of the certificate of title and LIM report soon after you’ve viewed the property.

If you’re buying the property by negotiation, then you can wait to do your due diligence until you’ve put in an offer and it’s been accepted. Typically you would include the separate aspects of due diligence (such as building inspection, meth testing, finance, LIM report etc.) as conditions of your offer. Your lawyer may advise you on what to put here.

If you’re buying a property through an auction, you need to do all your due diligence before auction day. It’s a good idea to get your lawyer to review the auction documentation so they can make sure you’re well informed before bidding. If you win the auction, once the hammer falls you legally have to buy the property, so you don’t have a chance to do your due diligence afterwards. Doing your due diligence before the auction is the only way to make sure you’re informed before buying the property. Unfortunately this means you might be a little out of pocket if you pay for the various reports and don’t win the auction, but paying for the opinions of experts is a good way to understand what you’re bidding on.

Before you’re really set on a house there is some informal research you can do as part of your due diligence. It pays to do this up front before you make an offer or spend money on specialist reports. First you’ll want to make sure the house has all your must-haves and some of your nice-to-haves, then have a look at the community. What events happen in the area? What are the local schools like? What decile rating are the schools? What’s the public transport like? It’s a good idea to also look at the council’s unitary plan. You might also want to look at the values of other houses in the area.

Once you’ve done your research and decided the house and the area are for you, there’s some formal due diligence to undertake (these are the things that you’ll likely outline in the conditions of your offer). Make sure you chat to your lawyer about due diligence as every purchase is different.

There are documents that you can access that give you important information about a property. Talk to your lawyer about the property you’re buying and what documents you should review. Here are some suggestions:

• Certificate of title. A certificate of title details the rights and restrictions applied to the land and proves the ownership of it. It will show information like the legal description of the land and the size of it. It’s also how you find out what type of land ownership applies to a property (e.g. fee simple, leasehold, cross-lease or unit title). Talk to your lawyer about types of property ownership so that you understand what you’re buying. It’s important to get a copy of the certificate of title for any property purchase. The real estate agent should give you a copy of the certificate of title; otherwise you can purchase one from LINZ (Land Information New Zealand).
• LIM report. This is a report from your Council which contains some information that it holds about the property. It could include things like rates information, land features (characteristics and potential hazards like erosion), information about stormwater and sewerage drains, and building and resource planning consents. When you request a LIM report from your council, you’ll need to pay a fee. It’s a good idea to ask the real estate agent if they’ve already got one they can give you, in order to save you a bit of money. A LIM report can help you understand if the property meets the council’s standards and has code of compliance – this is especially important if it’s been renovated.
• Property file. If the property you are looking at purchasing has undergone changes since it was originally built, you can request the property file from the local Council. The file will contain documentation like building and resource consent and correspondence about the property.
• Group agreements. If your property is part of a body corporate or a residents association, you’ll want to review the agreement so that you understand your obligations as a member of the group. It’s important to run these documents by your lawyer.

No matter the age of the house, or how great you think the condition is, it’s important to get a building inspection. The inspector will help you understand the condition of the home and may find any issues that it has. Make sure a building inspection is in your list of offer conditions, so that if the inspector finds any issues you can consider revising your offer. A meth test could also help to identify any illegal use of the property and provide options for remedy.

If you’re buying a section, rather than a house, you might want to get in touch with an architect, builder or engineer to get guidance on what you can build and what infrastructure (like wastewater and power etc.) you’ll need.

We’ve said it before but sorting pre-approval before you start house hunting is really important as it means you can make an offer with confidence. As part of your due diligence, when you’ve found a house you want to make an offer on, contact us with the details so we can make sure you’re pre-approved and the house meets our criteria. You’ll then want to include obtaining finance as one of your conditions in your offer so that you can finalise your home loan after your offer has been accepted.

A registered valuation is a report that assesses the property. It contains information about the property, its location and compares it to similar sales in the area to determine its value. This can be useful if you’re not sure what price to offer as it provides an impartial and expert opinion on the property’s value.

Sometimes we’ll require you to get a valuation in order to meet the conditions of your home loan. We’ll let you know if we require a valuation, and will organise it on your behalf through an approved registered valuer using our panel valuation service. The valuation shows us a number of things, like whether you’re paying more for the property than its worth.

It’s important to be really thorough with your due diligence so that you know exactly what you’re buying. If you’re informed about the area, know of any issues with the house, and understand the title and any restrictions on it, you’ll be better informed to deal with costs and issues that may arise.

One of our customers recently learned about the importance of due diligence when she got a building inspection of a house she wanted to buy. The house had an older deck which had been upgraded with some newer wood. The building inspector discovered that while this fix was great, the beams were still old wood that was in terrible condition. In the end, the buyer was able to negotiate $5,000 off the purchase price. While that doesn’t seem like a lot of money compared to the overall price of a house, it would’ve been a lot of money to have to pay to fix the issue just after buying a house. Without being thorough with her due diligence, our customer could’ve run in to a bit of trouble.

Remember to discuss due diligence with your lawyer early on in the house-buying process and they’ll be able to make sure all bases are covered. You should also talk to us early on about any conditions we need you to meet for your home loan.