Home seekers will need to ask vital questions before buying in the current market, writes Aidan Devine.
Performing basic property checks and due diligence has become critical for house hunters in the booming market, experts warn.
The frantic pace of sales has put home seekers under pressure to make snap decisions, with prices rising nationally at the fastest pace in 32 years over March, according to CoreLogic. With buyer competition expected to stay strong in the coming months, property advisers said home seekers could mitigate the risks of purchasing quickly with some key due diligence checks:
HOW BANKS VIEW THE PROPERTY
Real Estate Buyers Agents Association president Cate Bakos said the most critical step in the due diligence process was making sure banks would finance the purchase.
“Doing due diligence is checking anything that could prevent you from being able to buy. Getting a loan for the property is obviously a big part of that,” Ms Bakos said.
“Some banks won’t lend for certain properties, locations, zoning or title types if the purchase is with less than a 20 per cent deposit. You need to understand what banks don’t like.”
Attributes that could result in banks knocking back a loan application included flood or fire risk or micro-apartments with a floor area below 50sqm.
Lenders also viewed areas with an oversupply of housing as a red flag as it raised the risk of prices falling and the property becoming worth less than the purchase price.
Oversupply was a particularly common problem in high-density areas with a glut of new apartments up for sale, Ms Bakos said.
“Banks at any time will have a list of postcodes they don’t want to accept, it’s not always publicised but a mortgage broker will be able to tell you,” she said. “Of course, if you’re only borrowing 60 per cent of the value, banks see it as a lot safer and you will probably get the loan, but very rarely do people have that.”
HOW PRICE COMPARES TO VALUATION
Another vital due diligence check, and one closely linked with financing, is how the purchase stacks up with the “market value” of the property. Banks send independent professionals to value properties before they can approve a loan. And this means problems can arise if the valuer determines the home is worth less than the price paid.
Property Investment Professionals of Australia chairman Peter Koulizos said buying at a reasonable price was particularly important in the current market, where emotions were running high. “There are a lot of vendors putting properties up at ridiculous prices,” he said. “Always find out what comparable properties have sold for. That’s properties that are in similar condition in the same location and have the same land size. Don’t go further back than three months. The comparable prices for sold properties will be a much better indication than the agent (guides).”
Empower Wealth Advisory founder Ben Kingsley said buyers could avoid overpaying by keeping in mind the attributes that tended to devalue a property.
Common examples were a location on a main road or under a major flight path, high voltage power lines nearby or being outside the catchment area of a popular school, he said.
An easement – which gives a range of third parties the right to use part of the land – had a significant negative impact on value, Mr Kingsley added.
WHAT’S IN THE CONTRACT
Getting a conveyancer to do an extensive review of the sale contract was an obvious step in the due diligence process – but one many buyers skipped, Ms Bakos said.
“Some people think they can read contracts themselves or they simply put blind faith in the agent,” she said.
“Other times it’s too fast a review from the conveyancer or they didn’t have all the details to recognise what important bits of information needed to be in the contract.”
Important items for a conveyancer to check were whether extensions on the property were council approved and outstanding caveats and debts on the property.
In some states, vendors are also required to disclose any issues they are aware of such as asbestos but Ms Bakos cautioned buyers not to assume the sellers would be upfront. “It what’s vendors know about and they can play dumb,” she said. “Whatever is discovered after the purchase is up to the buyer to rectify. It’s up to you to manage the risk.”
Issues such as structural weakness, termites or other unforeseen problems could usually be uncovered by getting a building and pest inspection done, Mr Koulizos said. “Get an inspection report in writing,” he said. “Oral reports are not worth the paper they’re not written on.”
OTHER LOCATION ISSUES
Local councils can help with other important due diligence checks, according to Ms Bakos.
“Find out if there are any development approvals in the area. If there is an approval for a double-storey house next door it can catch people out when they realise they’re now overshadowed,” she said. “You also want to check if there is going to be any road widening or zone changes. It all makes a big difference.”
Neighbours were another factor frequently overlooked, Ms Bakos added. “You want to have an idea if there are troublesome neighbours. Try to check out the street at different times to the inspections. If you’re in doubt, knock on a few neighbours’ doors.”
Those buying in apartment blocks could discover any issues within the building by asking the agent for the minutes of the last strata general meeting. The minutes will reveal if there are expensive problems such as flammable cladding. Any talk of engineering reports should be a red flag as this suggested structural problems, Ms Bakos said.
GETTING A HELPING HAND
Performing thorough due diligence is an exhausting process, but buyers don’t have to do it alone. Mortgage brokers, real estate agents, local council and buyer’s agents, if you’re prepared to pay the extra cost, can help smooth the process. “There are more than 40 variables you need to look at when buying,” Mr Kingsley said. “It’s a lot but you don’t need to do everything yourself.”
DUE DILIGENCE CHECKLIST
- What type of title is the property under?
- Does the property have working water, sewerage, gas, electricity and internet connections?
- Are there any proposed or granted planning permits in the area?
- Is the building safe to live in?
- Does the property get affected by bushfire or flooding?
- Were recent renovation works undertaken and were they covered by insurance?
- Do you know the exact boundary of the property?
- What have comparable properties sold for in the local area over recent months?
Aidan Devine, Daily Telegraph, 1 May 2021