Home buyers are commonly encouraged to undertake due diligence before a property purchase. But what does this term really mean, and how should it fit into the buying process?
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Due diligence is the investigation of every aspect of a property that could affect its value and suitability as a home or investment.
Unfortunately for many buyers, due diligence involves little more than a building and pest inspection and contract review. These steps are essential, but only form part of the process.
Where to begin
Due diligence should start before identifying a property to buy, and the key is understanding the objective of the purchase, according to Wakelin Property Group director Jarrod McCabe.
"If you're looking at things from an investment perspective, your approach is going to be very different from an owner-occupier," he says.
McCabe says owner-occupiers should consider how long they intend to live in a property and its suitability over that period. Investors, on the other hand, should be targeting properties that see demand from multiple buyer-types to maximise the chance of price and rental growth.
Buyer's agent and NewFandangled Properties director Lesley Gregg says most buyers underestimate the financial implications of a property purchase.
People work out the maximum they can borrow and go shopping for a house based on that," she says. "Often what's missing is the financial due diligence."
Investigate features and potential
A common concern for buyers is when properties are marketed with rooms that may not be considered habitable, according to property lawyer and Real Estate Escapes author Tim O'Dwyer.
Bedrooms and rumpus rooms in basements or attics could fall into this category, as low ceilings or a lack of windows mean these spaces may be considered storage rooms under local council regulations.
"From time to time problems arise when there has been an insurance claim, and insurance companies will use that as a reason not to honour a claim," O'Dwyer says.
Avoid deal breakers
Buyers should be on the lookout for red flags that may raise concerns with lenders, according to McCabe. "You do need to take account of what the bank might frown upon," he says.
Lenders factor in a degree of risk when determining acceptable loan-to-value ratios, and lend a smaller portion of the purchase price if a property could take longer to sell than comparable homes.
McCabe says common culprits are company title apartments, as well as properties in suburbs that banks deem to be oversupplied.
