Buying Guide: What Is Due Diligence?
Understanding this key piece of real estate jargon as you go to buy.
What you’ll learn:
- What is due diligence
- Your due diligence checklist
- Important due diligence documentation
When you start your search for your first home in earnest, you’ll hear a lot of real estate jargon and probably the most common question you’ll come across is, have you done your due diligence?
You’ll find that this involves both informal and formal homework on the property of interest, some to be carried out by you, some by your team of advisers. Read on to see what it entails.
What is due diligence and why is it important?
Due diligence is a legal term that’s been in use for hundreds of years, coming from two Latin words meaning “to owe” and “carefulness”.
Simply put, as a buyer, you’re responsible for checking that the property you’re interested in is a good investment and isn’t going to cause you expensive problems down the line. Is the roof going to need replacing in a couple of years’ time? Is the home in a flood zone? Is there a motorway planned nearby in the next five years? All these things will affect the value of the home and you and your lawyer will want to find out everything you can before you put an offer in and sign a contract.
Builder's reports can give you crucial information about the state of the property.
Property due diligence checklist
There’ll be stuff you can check out yourself and documentation you’ll want your lawyer to go through.
Fact-gathering questions you can ask:
- Do you like the area? Does the suburb or town have everything you need to make your life work? What will your commute be like, if relevant? Will you be close to shops, schools and green spaces? Are there community events in the neighbourhood where newcomers are welcomed?
- What are the council rates like? One of the big costs of being a homeowner will be your council rates. Take a look at the rates on the home and whether you’ll be able to afford them as well as mortgage payments and the costs of insuring the property.
- Is the property suitable? People often buy for their lifestyle today. Is this home going to accommodate the changes ahead in your life, such as expanding your family or downsizing?
You’ve been to view the property and you like the look of it and the area. You want to move forward and see if it’s a serious possibility. The vendor’s agent will offer you a series of documents which you’ll want to look at and share with your lawyer. These will include:
- A LIM report: Land Information Memorandum (LIM) reports come from the local council, and provide important information like resource and building consents, information about the land (for example, is it prone to flooding or at risk from erosion), the rates you’ll pay and information on sewage and stormwater drains.
- A builder’s report: this will give you a heads up about potential structural issues the house has, or could face in the future. The vendor will often have one done for their own information but you’ll be advised to get your own inspection done too even if it’s a brand new home.
- A valuation report: professional valuers will be able to give you a detailed picture of what the property is worth and your lender will often ask you to get one. It can be helpful when forming your offer.
- A certificate of title: this proves who owns the section of land the property is built on, how big the section is, and what you can and can’t do to it.
- The property file: for homes that have been altered since their original completion, a property file (which you can request from the local council) will give more info on resource and building consents and correspondence about the home.
- Property finance: a crucial part of your due diligence is getting pre-approval on your home loan which your mortgage adviser will help you with. Your lender will need to check that the home meets their lending criteria before you make an offer.
*We hope this article has provided some helpful information. It's based on our experience and is not intended as a complete guide. Of course, it doesn’t consider your individual needs or situation. If you're thinking about buying or selling a property, you should always get specific advice.
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