Clear Realty Real Estate Blog

I was reading some well-dramatised information about ‘leaky houses’ last week and it planted a seed for writing today’s article on due diligence.

Here is a great definition of “due diligence’ from the business dictionary – “Measure of prudence, responsibility, and diligence that is expected from, and ordinarily exercised by, a reasonable and prudent person under the circumstances.”

So what is prudent and responsible due diligence when it comes to Real Estate?

In my mind there are two separate times when you are conducting due diligence in Real Estate:

1) When you are visiting Open Homes across in different suburbs and evaluation where you want to buy and what type of property you want to buy.

2) Prior to purchasing a property.

For the purposes of this post I am going to focus on the types of due diligence that relate to purchasing a property.

Understanding the ‘playing field’

Due diligence is generally conducted in two ways, depending on the terms and conditions on the sale of a property. If the property is going to auction, then due diligence needs to be conducted prior to placing a (pre-auction) offer on the property or prior to bidding at the auction.

With a private treaty method (By negotiation, buyers – upwards guide, asking price) due diligence can be conduct after negotiating a price. The important point here is that, the appropriate clauses must be inserted prior to the conditional contract being negotiated and finally, agreed upon by both parties. With this method of sale, the advantage is that purchaser’s don’t have to invest any money to conduct due diligence, whereas under the auction terms and conditions, buyers need to invest their money in due diligence up-front without knowing whether they will be successful in owning the property.

With a Tender process, you can opt to place an unconditional offer on a property (or a conditional offer, so your due diligence will be conducted at different stages, depending on your choice of offer.)

What types of due diligence whould I be using?

These are the most common types of due diligence clauses that are seen in Conditional Real Estate agreements:

Conditional on Finance – This allows the prospective purchaser to finalise loan details with their preferred bank, or in other cases organise a loan from a bank/lending institution. Some people may argue that this isn’t due diligence and this is a valid point. The reason for its inclusion here, is in some cases the bank/lending institution will require further due diligence to be undertaken so that they are satisfied that they can lend the mortgage on a safe and legal property.

Conditional on Land Information Memorandum (LIM) – The LIM report is a blueprint on the property and allows prospective buyers to see what has taken place on the property during its lifetime. This includes consents issued by council (resource, building etc) and other important information such as if the property lies in a 1-in-a-10-year Flood zone, if the property used to be on market garden land etc.

Conditional on a Building inspection – This is a most common (and very important clause) and one that should be utilised by all purchasers. The building inspection enables purchasers to understand what areas of the home require attention, and also helps to assessing (with the aid of the professional inspector) whether these are areas of concerns which would warrant a cancellation of the agreement, or if they form part of an ongoing maintenance plan as mentioned in my post on getting a WOF for your home

These are the most common forms of due diligence (by buyers) in real estate. I could have gone in to a lot more detail about this, and I could explain more technical aspects of due diligence in Real Estate however I just really wanted to highlight the most common forms of due diligence that buyers should be aware of. If you want more information, then feel free to comment and ask away. I am here to help.

Andrew