Why due diligence still matters
Good times can breed bad practices. You know the real estate market is strong when buyers submit unconditional contract offers whilst forgoing due diligence such as building inspections. Or when un-renovated properties sell for comparable prices to renovated properties. Such displays of buyer aggression can be explained as taking a ‘risk on’ trading conditions.
Buyers have a higher appetite for risk given they believe the overall upside in the current market comfortably outweighs any risk of undetected property defects. Even though this buyer psychology is common in the current market, that’s not to say it is wise behaviour.
In contrast to ‘risk on’ behaviour, when confidence is slow and prices are stagnant or falling, buyers take a ‘risk off’ approach to purchases when it is hot. The property market was operating just like this only 18 months ago in 2012. How quickly things can change.
In hindsight, many buyers played it too cautiously back in 2012, passing up buying at great value. Anyone who was brave enough to have made a purchase then, effectively bought at the bottom of the cycle, whether by design or default.
Now there is a risk that some buyers may be being too aggressive for their own good. Paying for due diligence on multiple properties that you will inevitably miss out on, can cause you to question the value of doing due diligence. The temptation to pass up on due diligence also increases when reports are written up with multiple disclaimers and cautionary tales that do little to guide you in the right direction.
Even though the benefits and information gained from these reports may be minimal, they can act as safeguards against the discovery of post purchase structural defects, possibly saving you tens of thousands of dollars later. Therefore, they are a very worthwhile investment, particularly when their small cost is weighed up against the overall value of the transaction being made.
A Penny Saved is a Penny Earned.
There are a few ways to ensure that money is not wasted on doing due diligence on a property you may not ultimately secure.
‘The only thing worse than missing out on the right property is buying the wrong one.’
Firstly, if the price guide seems too good to be true, it probably is. Everyone is fully aware that bait pricing is rampant. Maintain pragmatism when assessing what a property is likely to sell for. If it’s likely to sell above your budget, don’t spend thousands on inspections, strata reports and contracts being read etc. This will prove fruitless.
Secondly, ask the owner via the agent or the owner’s lawyer what price they would be prepared to sell for today. If you can meet that price, then by all means, conduct some due diligence in a rapid time frame, knowing that it won’t be a wasted effort.
Thirdly, see if other buyers have paid for a pest/building inspection. If so,ask if the company that did that report will sell you a copy at a reduced rate, or offer you a rebate should you miss out on that property. Many companies are happy to do this at present.
Lastly, don’t ignore the obvious. A building inspection report on an un-renovated and unlivable property is going to tell you that the property is unlivable. Don’t pretend it’s something it’s not. If your budget is unable to oversee a total renovation project, don’t engage in one to begin with.
If a property is newly built or just renovated, a building report should still be done prior to purchasing it. Making a profit from developing is hard work. Disregard what you think you saw on The Block. Many people who attempt to renovate for profit lose money or at best, merely break even. As this reality starts to dawn on them, they begin to cut costs to meet their budget. A trained building inspector will pick up on any issues this may cause, if any exist.
To get full value from a building report or inspector, turn up on site when they are doing the inspection and talk through any practical issues they raise, with them. This often offers more value than just waiting for a written report. Some reports are full of disclaimers and alarmist language, yet tell you little about the true state of the home. A conversation with the inspector can add great context and value to their written report.
Strata reports are often a great source of information for apartment buyers. Projected works or increased fees, neighbour disputes and structural issues are all contained in strata minutes. Don’t just read the minutes of the most recent meeting, go back several years to ensure that there are no festering issues. An unexpected special levy shortly after purchasing an apartment for top dollar, can set your finances back a long way. If you do this type of research, at least you will know if there are any impending levies prior to buying. They can then be factored into your offer/plans.
Paying for due diligence on multiple properties in a competitive market environment can be frustrating. If you are considering passing up on this pre-purchase research, please note that you may be taking an unjustified risk. The only thing worse than missing out on the right property, is buying the wrong one.