When you’re shopping for property, it seems like a no-brainer to get a house checked out before you buy it. But people do buy property without doing their homework, known in the industry as ‘due diligence’.
How often do people buy without doing their due diligence? It’s hard to say, but it’s always been a feature of the property market and it seems to be becoming more common, according to Mark Honeybone of Property Ventures.
“We’re certainly seeing more of it in Auckland; one-day or no due diligence is now part of the market.”
Five types of people who don’t do their due diligence when buying property
1. Desperate buyers in a frantic market
Auckland’s property market has been so fierce it can leave people feeling desperate to buy at any cost. Stories abound of house-hunters spending $1,500 to $2,000 on due diligence on a house before arriving at auction to find the opening bid is over their budget.
“By the third time that happens, they start doing whatever it takes to secure a property out of frustration,” says Alan Henderson, director of Erskine + Owen.
That goes for both homebuyers and investors, and Honeybone has recently seen this first-hand.
“I recently sold a property in Papatoetoe for over $700,000 and the only due diligence done by the buyer was walking around it for 20 minutes, plus reading the council files beforehand.”
Honeybone is also seeing some of the same desperation entering the Tauranga market, too, driven mainly by Auckland investors.
One of his investor clients missed out on a Tauranga rental because his offer was the same as another buyer’s but with an additional five-day due diligence clause.
Queenstown is also “on the upward trajectory and getting heated,” says Henderson.
2. Buyers who want to make a clean, unconditional, fast offer
To try to secure a property in a busy market, buyers are aiming to submit offers that have as few clauses as possible.
Vendors encourage this – Honeybone recently had a vendor who rejected an offer with a 10-day due diligence clause, in favour of an unconditional offer $10,000 less.
This is most prevalent in a sellers’ market; in a buyers’ market it’s more normal for vendors to accept a five- or 10-day due diligence period.
3. Investors who are just ‘buying on the numbers’
Some investors don’t care about the condition of the house, says Honeybone, because they’re only interested in the land. If it’s subdivisible or a minor dwelling can be added, they don’t bother worrying about a building inspection or unconsented work.
He adds that this is still a big risk and “some will get caught out”.
Traders who buy, renovate, and resell are among those who sometimes buy on numbers alone. Henderson says he would sometimes buy ‘sight unseen’ when he was trading 15 years ago, if he knew he was buying at a significant discount and could factor in unexpected costs.
However, he says this is still a risky strategy.
“Sometimes you can walk through and think, ‘Yeah it’ll cost $30,000 to fix’. Then you discover the leaky roof, that’s another $15,000. And an addition that’s not consented, so it has to be ripped off, which removes 30m2 of floor area, and that’s another $30,000.” (Unconsented additions can sometimes be consented later, but if they’re not compliant with the building code, “you’re pushing water uphill,” warns Henderson.)
4. Experts who know a building or street like the back of their hand
Apartment investors who know particular buildings extremely well will sometimes buy apartments sight unseen. Investors who specialise in one small suburb, like Dunedin’s block of university student rentals, may also buy sight unseen.
But in this case, Henderson says, they’ve effectively done their due diligence in advance. It’s nearly impossible to compete against these buyers, who can make well-judged unconditional offers within a few hours.
5. Subscribers to the ‘She’ll be right, mate’ school of philosophy
There are buyers out there who are prepared to trust their own judgement or trust the market to deliver a good result. There are likely to be plenty of instances of people buying sight unseen or doing no due diligence, with no problematic aftermath.
However, if problems do occur, they can be extremely expensive and stressful.
Harcourts CEO Hayden Duncan says a lack of due diligence is the main reason for disputes between vendors and buyers after a settlement has taken place. Whether it’s building issues, zoning, local conditions, or a buyer who “may not have an accurate understanding of values and pays too much.”
Take this white elephant in Waipukurau bought sight unseen by an Auckland investor: “There was a lot more wrong with it than I had anticipated,” he said, while simultaneously claiming, “It’s a damn bargain.”
The excitement of thinking you’re getting a fabulous bargain can lead you to underestimate the costs of repair.
Mortgagee sales are a particular risk, says Henderson. You won’t necessarily get a chance to walk through the property and there have been instances where the former owner or tenant has ripped all the fittings and wiring out of the building.
The building could even still be occupied and the cost of evicting the inhabitants will fall to you.
No due diligence? No deal.
For both Henderson and Honeybone, who buy properties on behalf of other people, purchasing without doing their due diligence is completely out of the question.
“I have a duty to my buyers to make sure they make the best-informed decision,” says Henderson. “We insist on them doing due diligence. Where we miss out is when we come up against homebuyers who are prepared to cut out the due diligence in order to win negotiations.
“There’s no way I’d do it for my investors – you’re looking at a half a million dollar transaction at least in Auckland.”
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