Due Diligence: Avoiding the Property Lemon.
"Did you do your Due Diligence?" It's a funny term, but I am still surprised at the questioning looks I get when I ask this question.
Put simply, Due Diligence is a series of tests and checks (done diligently, of course...) to make sure that what you plan to buy is actually worth what you're paying for it. It's all about ensuring that it's not going to cause you a load of expensive repair, maintenance and legal headaches.
It's also part of working out how much you need to spend if you decided to go ahead and buy the proverbial "renovator's delight"...
There are several factors which make up a Due Diligence test on a property:
- Building inspection
- Pest inspection
- Professional independent (non-bank) valuation
- Legal checks
- Estimate of renovation costs (including a comprehensive list of every last item which has to be done)
- Estimate of expected value/rental return upon completion of renovation
- Calculations relating to whether, or how, you can afford to purchase and maintain repayments on the property (and whether it is positively - or negatively - geared)
Whatever you do, as a property investor (or even as a homeowner), don't kid yourself that you can purchase a property without one or all of these factors checked.
Make sure, also, that all the relevant inspections you get are totally independent.
Don't take the word of the vendor's real estate agent that they know a good valuer/building inspector/pest inspector who will do you a good price because of them. I will confess that we made this mistake with our first investment property, and we paid for it dearly later!
If NSW government regulations change, however, this could become more difficult. New laws to be introduced in July 2010 may see the cost of inspections put on to the vendor. While this may save the purchaser a great deal of extra money, this leaves the system open to abuse by unscrupulous inspectors in cahoots with vendors and agents. We will have to see how the system is designed before I will be completely satisfied of its reliability.
And here's another tip: Go around with the building and pest inspectors while they are doing their jobs, and ask any questions you feel you need to: about something you think you spotted and whether it's an issue, or something you don't understand. You will learn a lot. |
I promise, as you view and purchase more properies, you will get better and faster at spotting the lemons before you get too far!
Do you have a question about Due Diligence?
So... ask away!
Do you have a question about property investing that's not answered here or elswhere on this site?
Ask it here and we'll try our best to answer it for you. Sometimes there's some research involved, so please forgive us of we take a little while to post back.
Others can also comment (politely, please!) too and help you out. It's a bit like a forum and FAQ rolled into one!
Just remember, we're not financial advisers, so you should use the information we give here as a guide only (in relation to your personal circumstances) and see an accountant or financial adviser before proceeding further.
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Buying a unit 
Hi my name is Aaron,
Is a 2 bedroom unit a good investment ?? what are the perks and flaws oppose to a house. i would love to buy a unit i am looking …
In this Section
A Building Inspection will save you from buying a Property Lemon A Pest Inspection could stop your property from falling down! Use the Tenant Checklst for vetting tenants, before the bad ones get you!
Return from Due Diligence to Investing in Rental Property
