Getting your house in order

12th September 2006

What can you do to make sure the property you're buying isn't a lemon before settlement day arrives? Australian Property Investor magazine finds out.

story Monique Wakelin

It's tempting to think you're nearly home and hosed once you've found a property you like. Surely all you have to do now is to nail the winning bid at auction or negotiate skilfully to seal the deal?

Take care! Your 'sure-fire' investment or dream home could turn out to be a lemon in disguise. What's more, rectifying any major shortcomings after settlement could have a disastrous effect on the capital growth of your real estate holdings and your asset creation plans.

Conveyancing and other contractual matters

A key benefit of residential property ownership in Australia is the choice that it bestows - whether you choose to live in it, invest in it, sell, bequeath or improve it.

Paradoxically, that 'freedom' generally brings with it certain restrictions in the form of local or national planning controls, permitted uses, heritage overlays and body corporate constraints. And the conveyancing process by which these restrictions are discovered and checked before the title of a property is transferred from vendor to purchaser can be fraught with pitfalls.

What actually happens during the conveyancing process varies from state to state, but it generally involves some or all of the following steps:

Contract paperwork

The vendor's solicitor prepares a contract note or contract of sale that provides information about the property. This may include a copy of the title, a plan of the subdivision, any restrictive covenants, details of easements, shared driveways or boundaries, planning permissions, council zoning and usage status, potential road works or commercial developments that may impact on the residence, fixtures and fittings and outgoings such as council and utility rates and body corporate fees if applicable. The contract also stipulates the settlement date, which is generally 30, 60 or 90 days and any special conditions required by the vendor or negotiated by the purchaser. For example, if you're buying by private treaty you may be able to make the contract conditional on a building inspection.

Sometimes, detailed information about the status of a property must be provided in a separate legal document. In Victoria, this is called a Section 32.

As a prospective purchaser, it's your responsibility to vet the contract and accompanying documents to ensure all necessary disclosures have been made and that they contain nothing untoward that could affect your proposed use of the property. For this, you should engage a solicitor or accredited specialist conveyancer.

Contracts for off-the-plan property purchases are notoriously complex.

"In many off-the-plan transactions, the vendor has quite a lot of latitude to make changes," says Anne Nielsen, a specialist in property law with Russell Kennedy, a Melbourne-based legal practice. "So it is essential that you understand exactly what you are buying in terms of room size, location in the block, views or outlook, fixtures and fittings."

Importantly, from the start you should be open and honest with your solicitor about what you want from the property.

"We don't have psychic powers," says Nielsen. "There are so many different circumstances that can apply. For example, some purchasers want to use their property for an activity that may not be authorised by the local planning scheme, like car detailing. Most people would consider that a bit of a hobby but it may not strictly be allowed in a residential zone."

Certificate of title

Your solicitor or conveyancer will obtain a certificate of title through the state or territory land titles office. This is to confirm current ownership of the property and to ascertain whether any third party, usually a bank or lending institution, holds an interest in the property. The certificate of title will also contain a plan of the property showing boundaries, common land and private property.

Land transfer

You will be asked to sign, but not date, a land transfer document. This will be finalised at settlement and lodged with the stamp duty payable on the value of the land transfer.

Body corporate

If you're buying an apartment, your solicitor or conveyancer will request a body corporate certificate with details of any current and proposed work to buildings and common property. This should include any additional levies for maintenance or repairs where costs can't be met from the regular body corporate fees.

Mortgage

If your purchase is dependent on a property loan, your solicitor or conveyancer will be asked to supply certain documentation to your lender, including the contract of sale, the vendor's statement if applicable, the title search, land transfer document, insurance certificate and relevant statements from council bodies and utility companies.

Your lender will forward your mortgage documents to your solicitor or conveyancer for you to sign.

Extra fees

Council and utility payments will be brought up to date at settlement, and you may be asked to make additional payments once your solicitor or conveyancer has liaised with the vendor's conveyancing representative.

Going it alone

Some investors and homebuyers opt for one of the many DIY conveyancing kits currently on the market. While DIY kits may work well for straightforward property transactions, for more complex purchases they could end up costing you the time and money you set out to save in the first place. Besides, most solicitors and specialist conveyancers charge modest fees considering how much is at stake. Ask for a quote first, making sure you specify any particular issues on which you want advice.

Nielsen frequently sees DIYers come unstuck.

"The major problem is that they don't usually have the legal background and training to identify potential pitfalls and problems," she says. "If they fill in any part of the form incorrectly or if something goes wrong along the way, they may not even be aware there is a problem, let alone know how to prevent or fix it!"

Pauline Barrow, national vice president of the Australian Institute of Conveyancers, the peak body representing specialist conveyancers in Australia, endorses Nielsen's view.

"Nothing is straightforward in today's highly regulated society," she explains. "With GST, the Building Act and umpteen other statutory requirements, anyone who undertakes the conveyancing process needs specific skills to address an exhaustive procedural checklist, regardless of whether it's a basic property transaction or a highly complex purchase.

"What's more, even though most private sales come with a cooling-off period, many purchasers are in a contract before they know it. And they don't even understand that," she says. "Once you have made an offer and it has been accepted, you are under contract. It's often an emotional time, so the sooner you seek specialist advice, the better."

"But I still want to be involved!"

If relinquishing all control to the professionals leaves you feeling redundant, here are some opportunities for you to become involved in the process:

• Contact the council for a certificate that explains the planning controls and restrictions that apply to your proposed purchase.
• If you suspect the area of fenced land is less than the land on the title, engage a surveyor to check the boundaries.
• Ask the council whether there are any heritage overlays and guidelines that apply should you be purchasing a period property and intend to renovate or extend at a later date.
• If you're buying a new or off-the-plan property, check out the developer and/or builder to establish their track record and credentials. It's also useful to see how other directly comparable re-sales have fared.
• You have a legally insurable interest in the property you're purchasing from the time you sign the contract of sale. In some contracts, the vendor may even specify that the property is at your risk once the contract has been signed. Contact your insurance broker to arrange a cover note in advance - effective either from the day of auction if you're confident of having the winning bid or as soon as you enter into negotiations in a private sale, with effect from the day you sign the contract. Besides, if you're taking out a loan for the purchase, your lender will require confirmation that you've taken out building insurance to protect its - and your - asset.
• Most property purchasers appreciate the need to protect their building and/or contents against damage or loss once they have taken possession, but few realise the importance of insuring against a range of other potentially damaging events. What would you do if a tenant left your investment property owing a substantial amount of rent? Could you meet your financial commitments if you became seriously ill or had an accident that affected your ability to work? Ask your insurance broker for advice on other essential protection for you and your property, such as life insurance, income protection and landlord's insurance.
• If you're purchasing a unit or apartment, establish the proportion of owner-occupiers to tenants. Aim for the ideal 60:40 ratio that generally exists in the wider community. Whether you're buying as an investor or a homeowner, the owner/tenant mix can impact strongly on capital growth and your ability to sell the property in the future.
• Find out what it's like to actually live in a place, because that's what you or your tenants will be doing. Check out the local café culture, strike up a conversation with local residents, or drive down the street several times over the space of a few weeks - in daytime, at night, on a weekday, and at the weekend.
• As a final check, make arrangements with the selling agent to inspect the property on settlement day. This is your last chance to establish whether the dwelling, fixtures, fittings and garden are as agreed with the vendor. Notify your solicitor or conveyancer immediately if anything is amiss, apart from fair wear and tear.

Bricks, sticks…pests

When it comes to assessing the structural integrity of a building, what you see may not always be what you get. The home or investment property you have set your heart on may hide a multitude of faults. Only a qualified, experienced architect or builder has the depth of knowledge and skills to uncover any defects or potential problems and to recommend what needs to be done to rectify them.

But what should a building inspector do for his fee?

"A thorough building inspection should cover the whole structure - roof, walls, floor and sub-floor area," says Robert Caulfield, managing director of Archicentre, the building advisory service of the Royal Australian Institute of Architects. "This includes evaluating services like plumbing, wiring, windows, doors and frames, and the condition of fixtures and fittings like taps, toilets, basins and stoves. Even if some areas are not accessible, a building inspector worth his salt should be able to make a reasonable assessment of any potential problems."

Although building inspectors aren't responsible for ascertaining whether the property complies with municipal and state planning regulations, they should also warn you if they suspect that something doesn't necessarily comply with building regulations, says Caulfield.

"For example a ceiling below minimum height may be a telltale sign of unauthorised work.

"We see too many properties where renovations or extensions have obviously been done without a permit," says Caulfield. "There might be a dangerous aspect to the building, so it's essential to establish whether the work complies with relevant building and health regulations." If in doubt, ask your solicitor for advice.

There are a host of environmental issues that can impact on the structural integrity of a building.

Caulfield explains. "Numerous trees around an older brick home can draw moisture out of the soil and increase the likelihood of cracking. Rotting leaves in roof gutters can lead to rust damage. Houses on slopes can be prone to dampness as water runs underground, causing moisture to rise through the walls. In buildings near the coast, the salt air can cause rapid corrosion of aluminium windows and deterioration of terracotta roofing tiles."

Caulfield also recommends a pre-purchase pest inspection.

"More than 35 per cent of Australian homes offered for sale have a termite, borer, rot or other destructive timber pest problem," he says.

"A trained, qualified pest inspector can assess the severity of the problem, how much damage has been caused and how much it will cost to fix it," says Caulfield.

For units or apartments, Caulfield recommends that the pre-purchase inspection also includes a general look at the whole building to ascertain whether you could be incurring a liability for someone else's problem.

"Most of the structural problems involving walls, floor or roof will be covered by the body corporate," he says. "This means the ramifications of a serious problem with your property will be shared by the other owners in the body corporate. By the same token, if your apartment is okay and the apartment five doors down is showing serious cracking, you may be liable."

Above all, when selecting a reliable organisation or individual to undertake your building or pest inspection, never leave it to luck.

"Unfortunately, there are some organisations who just won't take responsibility for their work," says Caulfield. "It is unwise to deal with anyone who advertises using a mobile phone number or post office box number, or who doesn't have an ABN. Check that they have professional indemnity insurance which will give you a comeback should something go wrong."

When a property fails the test

When you're in the thick of the due diligence process and you hit one or two snags along the way, take heart: there are other properties. And yes, one of them really does have your name on it!

 

© Australian Property Investor magazine - www.apimagazine.com.au. Reproduced with permission. To subscribe to API, go to www.apimagazine.com.au or pick up a copy from your local newsagent.

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