Due Diligence is home buyer’s protection to avoid buying a lemon. Due diligence clauses set the conditions and time frames for the home buyer’s property checks and investigation.
Buying a Home
Why do You need a Due Diligence Clause?
Avoid buying a lemon
You cannot expect that everything goes always as planned. Everyone makes experiences to learn from. Buying a house is incredibly exciting but also nerve-racking. Each house that attracts your attention has its specific. How can you avoid buying a lemon?
You have heard stories about “leaky homes”, buildings fail to meet building code or regulations, contaminated land, flood prone land, missing council permits, insurance issues, problems with the Body Corporate, and the list goes on and on. It is a man made disaster when a home needs to be demolished or a dream turns into a nightmare.
The first level of protection is you making informed decisions and actually doing your homework when making an purchase offer. The second level of protection are the professional services you might engage to answer your requests.
Previously we talked about the common pitfalls when buying a property, so let us be more specific about the buying process and due diligence.
What is DUE DILIGENCE?
For the buyer the Due Diligence (DD) includes everything to be checked upon the property to buyer’s satisfaction. The Due Diligence starts with putting a DD clause on the sale & purchase offer presented to the seller (vendor). If accepted by the vendor, the DD clauses set a time frame for completing all property related investigations.
Not only the buyer, also the seller normally performs a due diligence analysis and would not accept any buyer. When all parties are satisfied the negotiation process ends by signing an “unconditional” agreement.
Due Diligence includes
The buyer would specify DD clauses about a time frame and the conditions upon to be satisfied such as:
· Title Search
· Finding insurance cover
· LIM Report (Land Information Memorandum)
· Financial conditions such as obtaining finance
· Building inspection
· Structural engineer report, earthquake safety, land stability
· Geo-technical engineer report looking at the solidity of the ground or risks of liquefaction, etc
More information - go to “How can you secure your interests as buyer?”
Purchase process - Who is the driving force?
In most cases the seller’s agent is the driving force to put the deal on paper. If confident, you don’t need a lawyer to make an offer. The real estate agents can help with DD clauses you want, but read here more. You can easily prepare your own DD clauses. Remember, the friendly agent gets paid by the vendor. If you are unsure take professional advice from your lawyer.
Purchase Price when going “unconditional”
Once the seller has signed your offer including your DD clause, then you have to complete your due diligence before the set date/time ends.
If satisfied, you will confirm the contract as “unconditional”. “Satisfied” means you have obtained all required papers, finance approval, insurance quotation and completed your investigation. That might include a registered valuation (RV), quotations for improvements or repairs and so on.
In case you obtained some quotes for repairing a defect property you would propose an adjustment to the set purchase price. Don’t be afraid to re-negotiate a purchase price set before any building inspections.
Due Diligence Clause—Examples
Using a generic Due Diligence clause is not always a straight forward process. Several times I experienced that the agent or vendor was opposed to it.
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