8 Basic Strong Property Due Diligence checklist NZ
Buying property is a scary process and a process you want to get right especially when it’s your first time. So, one of the things to protect yourself before making any offer is doing your due diligence, but what is due diligence? Is there a property due diligence checklist in NZ?
If you are buying your first home and if you were like me when I bought my first home many people said have you done your due diligence before buying it. I was thinking those are some pretty big words and I didn’t know what it really meant and what it related to when purchasing my first home. Even googling was hard - ‘what is due diligence’ there isn’t much information on it or it only refers to buying stocks or buying a business.
Due Diligence is like checking everything before making a purchase on the property, what is everything? Well, it could be the finance, building, location, land, legal and a whole lot more than you want to check before making a purchase. In this article, I’ll share 8 basic property due diligence checklist nz.
Before we do a deep dive into the 8 property due diligences that most property owners and investors look for before deciding on making an offer on the property.
We need to understand what makes a due diligence checklist, if you’re buying your first property then reading will only provide some insights, until you start the process yourself and learning it on the job so to speak you really have a feel of what this whole due diligence process is all about.
Good property investors and owners base their decisions on buying numbers, these being purchase price, gross yield, net yield, potential gains and how it fits in their entire portfolio of properties.
What sets great property investors from good property investors is they look at the entire picture. So, it’s not just the numbers they look into but the entire aspects of the property and the wider ramifications of how this property would look in the future. But there is only so much planning and due diligence you can do, what this does is reduce and mitigate the risk so that you have reduced the chances of failure or avoid putting yourself in a risky position.
What is good due diligence on buying a property in nZ?
This is hard to quantify because it really depends on the experience of the individual, the more you do it the more you know on what due diligence you need to complete before making a decision.
So to help with this process you really need to have a great team behind you and avoid doing it all yourself, because there is only so much you can do as an individual and if you have a team behind you, then you make much more informed decisions on to either go unconditional on the offer. I’ve written an article here on who you should have on your property team.
I won’t go into too much detail, but below is the typical people you’ll have to form your superstar team:
- Solicitor - They will look after the legal, such as writing a due diligence clause in the Sales and Purchase agreement and also look at LIM reports, etc
- Mortgage adviser/broker - They will organise and obtain finance for you and find the best deal for you
- Builder - Having a great builder who can give you advice on the property structure is crucial as it could save you thousands of dollars
- Accountant - If you’re a property investor, I highly recommend going to an accountant to get your tax structure correct
- Real estate agents - There is a difference between buyers and sellers agent, buyers will hunt the deals for you and great seller agents will seek out the highest price for your property.
What is the process of doing due diligence?
If you’re going to buy a property, the first step is getting the property under contract meaning that you’ve put in an offer on a property subject to conditions within a certain time period. The most typical conditions are:
- Finance
- LIM report
- Builders report
- Any other conditions that you think are required or advised by your support team
Doing this, allows you to have control over the property and first rights to the property should the conditions be satisfied and you decide if you want to go unconditional or not.
The key here is to speak to your solicitor so that you can draft up a due diligence clause that gives you the right to cancel the contract and ultimately keeping yourself safe without having to provide evidence of why. A great solicitor can advise you on this.
Understand your numbers first before making a conditional offer
I see so many people who think the numbers make sense but when the broker or the adviser looks at it, the numbers say otherwise. Hence why it is super prudent that you check in with your mortgage adviser that the numbers check out before making any offers on a property. Otherwise, you’ll be wasting your time on it! Some key numbers to think about are:
- What is the market purchase price?
- What is the projected price?
- How much deposit do I need?
- What is the rental yield (if you’re buying an investment property)
- Can I get it below market value and if so, what is that market value?
- Is there a renovation cost that I need to factor in
Those are just some of the questions that you should be asking yourself, those are in no particular order.
Due diligence conditional offer
If the numbers check out, then you’ll make it subject to a due diligence clause as per what is advised by your solicitor, that way you’ve protected yourself if you need to cancel the contract.
Once the offer is accepted, i.e. the vendor and you have signed the Sales and purchase contract, then it is deemed under contract and at which point you can conduct your analysis on the property within the given timeframe that you’ve set out. Depending on the type of property, if it is your standard brick and tile house, then usually 5-10 working days is sufficient. You’ll just need to plan to get the professionals in earlier if it takes longer. Or you can make the timeframe longer i.e. 20 days. But if it is too long, the vendor may decline it and accept a shorter one. So it is a balancing act.
If you’re buying land, then sometimes it can go out to 30-45 days as people want to get ensure the land can be built on and give enough time to find builders quote to do the build so that you can organise finance.
During this time is where your mortgage adviser will seek approval on the property, the key is that the bank is happy to lend you the money and also if the bank is satisfied with the security as in the property itself. It doesn’t want to take on a security that is defective, most commonly plaster built homes. Hence why it is extremely important that you have the right support team to give you the correct advice!
Re-Negotiate
Most people skip this step after the offer is accepted, because people think that once the offer is accepted then that is it, the price is not going to move again. But it can! You can also negotiate before going uncodntional on the property!
The time to do is to aim just before the unconditional time/date, as then the vendor will be under pressure if he wants to decide to drop the price down further. This can come in the form of something that the builder has found during his building inspection or when the solicitor has identified that is something wrong with the LIM report, etc.
Conditions are satisfied? Then unconditional!
If all the conditions are satisfied and up to the standards that you want, then you decide to go unconditional or not. By going unconditional then it becomes a binding contract where you will have to pay the deposit that was set out in the Sales and purchase agreement. Once paid, then you wait for settlement!
8 property due diligence checklist in NZ
Alrighty now that we’ve got the process and the reason why due diligence is important, here is a simple checklist that is most commonly used.
Finance
- What has the broker advised you on how much you can borrow
- Does the property purchase price fit within your price range?
- What is the properties market value?
- What is the property actually worth?
- Have you done a competitive analysis of the surrounding area on this specific property?
- If you’re buying an investment property, what are the yields on the property? Such as gross & net yield.
- If you’re buying an investment property, what is the rental appraisal shown as
- What is the cost of renovation?
- What is the cost of improving the place and how much more value would it at to the property?
- What is the projected growth in the area by capital gains?
- What is the accountant advised you on?
- Is there a potential subdivision on the land? If so can you run numbers on it.
Legal
- Should you get a LIM report if it’s not provided by the seller
- Get the solicitor to look over the contract before signing
- Seek their advice on the LIM report
- Seek their advice if there are any issues with the Title, such as covenants and encumbrances
Land
- Is the land stable
- Can you get insurance for the property? I.e. Earthquake zone, cliff top property?
- Is there any risk with the land
- What sort of title is it the land on, i.e. leasehold, freehold, crosslease, etc
Property (the building structure itself, i.e. security)
- Is it structurally sound?
- How much is required to bring it up to a healthy standard or meet the new code i.e. healthy homes standard
- What is its cladding? Is it plaster or weatherboard?
- Any mould, rotting or borer
- Is there any unconsented works that aren’t disclosed
- If there are works done, has it got CCC (code of compliance)
- You should really get a builder’s report completed.
Vendor/Seller
- What’s the reason the vendor is selling, could you use it as leverage when negotiating?
- How long has the vendor stayed her
- Are they investors themselves
- Seek as much information you can as it could really help both parties to negotiate
Tenants (if you’re a property investor)
- Is it going to be vacant once bought
- Are the tenants going to stay?
- Speak to the property manager to get their history
- Speak to your property manager that could look at taking on the new tenancy
Area
- Has it got growth potential
- What type of industries and jobs around the area
- What is the population mix in the area
- Can it be subdivided?
- Has it got good school zoning
Neighbourhood
- What would be things that could turn off future buyers
- High voltage powerlines
- Cemetery
- Places of worship
- Are neighbours keeping their gardens clean
Do your due diligence before going to auction
Auctions are a funny thing, you basically have to be unconditional before bidding because if you win at auction, then you will pay that deposit and enter a binding contract.
It is super important that you need to do your due diligence before going to auction, you don’t have the luxury of having the first rights to the property like a negotiation or what was mentioned above.
Therefore, you have to be certain that you’re satisfied with the property before entering a potential bidding war!
I’ve written a whole article about auction tips here.
Summary - property due diligence checklist
There you have it, a due diligence checklist that people can take some notes from. This is not a bulletproof due diligence checklist. Always seek independent advice from each of the professionals, whether it’s your solicitor, mortgage broker or accountant.
If you don’t do due diligence or you’ve done poor due diligence, then you’ve exposed yourself to unnecessary risk that could of be avoided and ultimately losing money!
Have a good due diligence clause that can allow you to escape should something not meet your standards or problems that are so great that it isn’t worth completing the deal.
Good luck with the house hunting process and ensure you’ve got the right team behind you. If you are seeking a mortgage adviser, you can book a time with me below, or flick me an email will@simplyfinance.co.nz
If you’ve got any questions, then feel free to drop a comment below.