Due diligence

The April issue of the NZ Property Investor magazine included an interesting article about the due diligence as it relates to residential property purchases. They had a number of horror stories about those who bought without adequate due diligence – like the person who bought a property intending to build a house, only to find building was prohibited because it was next to a military airfield!
The way to reduce the risk of a bad purchase is to go through a thorough due diligence (DD) process . All purchase agreements should include a DD clause to the effect that the agreement is conditional upon DD to the satisfaction of the purchaser at their sole discretion.

The discovery of negatives would be good cause to go back and renegotiate the price or opt out of the agreement. For astute buyers, DD is an important part of the negotiation process.

Here are just some of the things to look at during DD. It’s not an exhaustive list by any means, so don’t take this as the be-all and end-all of the issues to consider.

• Is the title in order? Is it a fee simple title, a cross lease (where the underlying fee simple title is owned jointly but leased to owners of parcel that exists on it), or a unit title (where a defined part of a building is owned and common areas have shared ownership)? If the property is a unit title how much are the body corporate fees? Is any one-off expenditure planned in the future? Is there anything in the body corporate minutes which reveal problems like weather tightness, parking, access, noise, and the like?

• If there have been structural additions or alterations made to the original building were all necessary resource and building consents obtained? Has a Code Compliance Certificate been issued by the local council? Does the building contain asbestos? Is it weathertight? Is the electrical wiring and plumbing in good condition – and do they comply with current regulations?

• Has a meth’ test been done for contamination?

• If the property has a swimming pool or spa pool, does the fencing comply with the Fencing of Swimming Pools Act?

• Are the boundary fences actually on the boundary?

• Are there any covenants on the property? If so, how do they limit the use of the property? If there are bush covenants, are there any fencing requirements? Are there restrictions on the type and quality of building materials that may be used?

• Are there any easements on the property and if so what limitations do they impose upon your use of the land? Are there any easements on adjoining properties that may affect your use of the property or your privacy?

• What is the nature of the adjoining land? Is it Maori title that may not be subject to the same rules as general title?

• If you intend to build on the property, check the District Plan to make sure you are permitted to do the work intended.

• Does the property contain any heritage values or known sites of significance to Maori? (You may not find out about the latter until after you file a consent application!)

• If buying bare land in a rural area is council water and waste water reticulation nearby or at the boundary? Would you be required to connect to council services and if so how much would it cost?

• If council waste water is not available, is the existing system in good working order and does it have enough capacity for your intended use?

• If council water is not available, what will be the source of water supply and the cost?

• How much would it cost to put in access to the building site and power and telephone?

• Is a broadband available? Is it fast enough?

• Has the council noted any special land features or characteristics (including potential erosion, slippage or subsidence, flooding, or possible contamination or hazardous substances.

• What is a fair market value? Don’t rely on rateable value – it’s not market value. Obtain a valuation online or from a registered valuer. Just be aware that valuations are not precise. Values may vary markedly according to the sample properties used as a benchmark, and “massaging” the reference group has a material effect on the result. Be wary of valuations provided by the vendor.


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