THE IMPORTANCE OF A 'DUE DILIGENCE' STUDY WHEN BUYING PROPERTY
Category Advice
Buying property can be one of the biggest financial decisions you make. It is therefore absolutely crucial that you have the right information and tools to make the correct purchasing decision. Neglecting to do this could result in a costly and sometimes stressful outcome that could be avoided.
Performing a due diligence generally forms part of the precursor to commercial property transactions especially in the case of seasoned investors and property funds. This process has, however, generally been overlooked by purchasers, sellers and agents in the case of residential property transactions, and "smaller" commercial transactions. I have cited two scenarios below where the performance of a due diligence could have resulted in a more positive outcome. These scenarios are based on actual situations that have played out.
Transaction 1 - A residential unit was sold where the purchaser was under the impression that the property was let out for an amount of R15 000 per month, based on the what the seller had mentioned at the time of viewing the property. Following transfer, when the property was handed over, the lease over the property was, in fact, for R12 000 per month. In addition to this the lease stated that the tenant had a right to renew the lease (unusual in the case of a residential lease) for a further twelve months and that the rental was inclusive of internet services and streaming offerings. The total loss to the purchaser over a sixteen month period was approximately R64 000. Expecting a certain return on the investment and knowing this information beforehand would have resulted in the property either being purchased for a reduced price or alternatively the purchaser would not have considered it as a good investment at all.
Transaction 2 - A historic residential building was sold as 'student accommodation' in an 'upmarket', well established residential area. After the sale and transfer was concluded it was established that the property did not possess the rights to be used as student accommodation. The purchaser went through the process of attaining the requisite rights and had strong resistance from the neighbouring property owners, despite the property being utilised for this purpose for many years. This resulted in timeous and costly delays including; drafting/submission of building plans, professional fees for the submission to council, making representations in the various appeal attempts and costly outlays in terms of fire compliance, before the property rights were granted.
Had the purchasers invested in a due diligence exercise they may well have foreseen the potential financial and legal implications of the property not yet having the property use rights attached to it, allowing them to price the additional cost/risk into the deal or walk away.
Information unearthed by a due diligence process are also extremely valuable to the seller and agent. It allows the seller to realise the true market value of a property or to be realistic about an acceptable selling price. Disclosing all the revenant and crucial information transparently to purchasers and agents avoids unwanted claims in the future.
When mandated to sell a property, we pride ourselves in presenting all relevant due diligence information to purchasers to enable them to make informed decisions. We have recently tested PropDD (www.propDD.online) which gives you the platform and tools required to collect and store all the information required to conduct a thorough due diligence. We encourage you to do the same when considering any type of property investment.
Author: David Porter