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The year is fast drawing to a close. I trust you are pursuing your goals and keeping your dreams alive.

Continuing with our property series this month I want to talk you through the due diligence process. Ready??   Here goes:

1. Signatures

You don’t have anything to do due diligence on until you have a signed agreement. Once you are more experienced you might do your due diligence before making an offer but until you consider yourself experienced don’t waste your time or money on a property you don’t have under contract.

So first check that the agreement that has been signed by the vendor hasn’t been altered by them or if it has that it has been initialled. I have heard of situations where people have been doing due diligence on a property only to find an amendment wasn’t signed and the deal had been lost to another purchaser.

2. Council files

Sadly most councils charge for any access to their files these days so you just have to pay your money everytime, but it is ESSENTIAL that you check the council file on any property you are contemplating purchasing.

These days most councils have their files on computer, but occasionally you will be handed microfiche or an actual ringbinder full of papers.  Now there is often “gold in them thar hills” so TAKE YOUR TIME when you go through the files.  Here are the things you are looking for:
Plans. Are there house plans in the file. If there is then do they look like the dwelling you visited. Pay special attention to decks and downstairs living areas. Decks have very, very often been illegally built by DIY’ers and downstairs living areas often started out life as garages. With the new building code illegally converted garages or downstairs areas can be a nightmare to legalise. You want to KNOW if everything is legal. With older properties, especially where most of the plans have been hand drawn and writtten on, you need to magnify the document if necessary to read the detail.

A property I am currently involved with is an upstairs/downstairs home and income. We knew it wasn’t legal but it appeared fairly simple to legalise. When the plans were checked the downstairs area, which is now the income, appeared to be listed as 2 rumpus rooms on the plan. Now that was good as it meant it was originally permitted to be ‘habitable space”.  Getting a safe and sanitary or obtaining code compliance is not too much of a drama in this case. However when the detail was blown up, what looked like “rumpus” hand written across the 2 rooms actually said “slate tiles”.

Now this meant that it was originally not a habitable space, possibly not even meant to be enclosed. So to fix this now requires putting down a damp proof membrane and repouring the floor. Probably 5 to 10K  above what we thought. In addition this now means much closer inspection by council. So who knows what else they might identify?

One property I now own had a small single level house signed off on the file. What I was buying was a 2 storey monster with a separate double garage!!  In this case I established that I could obtain a safe and sanitary report for the property for around $1000 so I got that taken off the purchase price.

Another property in Otara I was going to buy had no record of any dwelling on the site at all. Council had no idea how the home and income that was built got there. In the end it looked like I would have had to do plans, apply for building and resource consent to legalise a 20 year old H&I!!

• Consents. In addition to the main dwelling the council files should also have every other consent that may have been issued. Swimming pools, additions, garages, minor dwellings, carports etc. Anything on the property should be found in the file.
• Zones. If you are looking at a future development site or a subdivisible then there is a whole lot of other due diligence you will need to learn to do that is outside the scope of this document, however one thing to check from the council file is whether there are any instability issues or if the property is in a flood zone. This needn’t put you off buying it but will be a warning that subdividing or even building an MDU might be a problem; an expensive problem.
• Easements. Title searches will also identify this but always check for documents or notes that indicate anything “weird” about the property. I looked at 2 deals recently where easements affected the value considerably. One was a 1200 sqm site that had nearly 800sqm of council easement. This meant that only one 400sqm square could be built on. This prevented subdivision and also meant the house could only be sited in one spot.  Another property had a notice attached which said, ( I can’t remember word for word). “This property may be repurchased at any time by the Crown if required for public works or becomes the subject of any claim including the Treaty of Waitangi.”
  In other words we can make you sell to the government any time we want.
• Council letters. Some of the best information I have obtained about TENANTS has come from council files. If you find several noise abatement notices in the file then you know the tenants are party hardy types. Or letters requiring the occupier to deal with rubbish or old cars etc. All this information is important for you to know.

THIS IS IMPORTANT INFORMATION FOR YOU

• Abatement notice or notice to fix. I only know about this one because it happened to me on my very first purchase. I’ll tell you the story so you know why it’s important.We were looking at a multiple income property in Auckland. The numbers were fantastic and the deal had been brought to us by a finder. We had to make an unconditional offer immediately so there was lots of pressure. We were told that 3 of the 4 income streams were legal so did our numbers on that. However the 4th income had been there a long time and there was no reason to assume we would lose it.So after checking the council file we proceeded to purchase it. On the day after we settled there is a knock at the door and 2 council guys are standing there. After confirming we were the new owners of the property they handed us an “abatement notice”. This is a document that said that due to neighbours complaints they had visited the property and discovered 2 illegal flats. We had 30 days to remove the tenants and remove all illegal works. Imagine how wonderful we felt. It nearly ended our investing before it started.

  Many months of unpleasantness with the council followed while we tried to legalise the property. It transpired that the property had been sold because of the abatement notice being issued. The property had been purchased and immediately onsold by 3 parties because of the council problem and every vendor had hidden it from their purchaser. Because we were Christians we decided the right thing to do was to legalise the place and suffer the loss ourselves.

  The reason this notice wasn’t in the council file was due to the fact that it was a recent and current event so the filing had not caught up with the situation. So the only way we could have found out about this problem was to ask someone in at council, so……..

  while you are in at council always ask to see a planner and get them to check the property online and ask them to confirm that there are no “abatement notices or notices to fix” currently against the property. Only in their system can they confirm this. The file may be out of date.

Final words about councils. For any of you who are now too afraid to even make an offer on a property after reading this, there is help!!  You can use a building inspection company who will, as part of their work, check most of these things at council for you. They are often ex council staff who know how the system works and they will get a copy of the file as part of their inspection. If you ask them they will go over the file for you and warn of anything that may be of concern.

I use myself and HIGHLY HIGHLY recommend

Mr Ian Wallace from Astute Building Assessments for those of you in Auckland.
He can be contacted on 0274455994 or abaltd@xtra.co.nz. Tell him Dean sent you

3. Building Inspection

Now that I’ve introduced Ian this is a good place to recommend that you get a full building inspection as part of your due diligence.  Often we think that if the house is brick or fairly new it would be a waste of money to get the building inspected, but a good building inspector will give you very useful information for before and after you purchase the property.

• Pre~purchase. Even a new dwelling will have issues. Little things that need fixing, minor faults that need addressing. I find Ian gives me a huge list of things that could be problems in the future and a suggested plan to fix them. Every single item on that list is ammunition in your negotiations on price with the vendor. For the cost of an inspection, say $500, you may save twenty thousand on the purchase price.
  ALWAYS GET A BUILDING INSPECTION
• Post~purchase. The other reason to get an inspection is that after you have purchased you can hand it straight to your handyman after settlement and get all necessary remedial work done immediately and then know the building is up to scratch. The report becomes the basis for your maintenance programme.
  ALWAYS GET A BUILDING INSPECTION

4. Valuation

Obviously the most important part of your due diligence is going to be deciding if the numbers work. There are a few aspects to establishing the value depending on what strategy you are using as an investor.

• GV (government valuation) or CV (council valuation). I find new investors especially often get really confused with the various valuation phrases. The GV or CV is a value struck by local government and is meant to be what the property is worth. It is also referred to as the “rateable value” However it is set based on historical data and is only updated every few years so the main thing to know about a property’s CV or GV is that it doesn’t mean a thing. A property with a GV of $300,000 may be worth anywhere between $250,000 and $1,000,000. OK?  So take absolutely no notice whatsoever of this figure.
• QV valuation. This is becoming the common name for an “online” valuation. QV stands for Quotable Value and Quotable Value New Zealand Ltd. are a company that provides a range of valuation services. There are other companies providing similar services but QV is becoming the generic name for them all. Now what an online valuation does is search the recent sales database looking for dwellings of a similar size on sites of a similar size in the immediate area around your property. Basically it averages those sales and gives you a valuation range for your property. It will include the other recent sales that it has used to get that price so you can see what has sold recently in the area.Usually the QV style valuation will be reasonably accurate.  However it is unable to make any allowance for things like the quality of construction,  views etc. Also because it is only averaging data, an unusual recent sale can skew the figures slightly. However for a normal rental property in an average suburb I find them pretty accurate and consistently on the low side. Any property I can buy at or below “QV” valuation is normally a bargain. Remember that.QV valuations cost around $30.
• Registered valuation. A registered valuation is completed by a registered valuer. They use the same sales figures as a QV valuation but they also visit the property. This means they have physically sighted the dwelling inside and out and can allow for things like high quality chattels, views and other things the computer database cannot “see”.  A registered valuation is often required by investors for banks to approve mortgages. The critical thing to understand here is that banks lend to 80% of registered valuation. So for a buy and hold purchase, if you can buy  for 200K with a registered valuation of 250K that is great news. It means you will be able to recycle your deposit fairly quickly. However you need to realise that this is not necessarily what you would get if you sold. That is called……
• Fair market value. When you are purchasing property to trade, none of the previous valauation methods are relevant. The only think you need to know is what will it sell for? What is fair market value? There is no bullet proof, scientific method for establishing this. You need to ask local real estate agents what they could sell it for and also know the area well enough to have a good idea of sale price.

All right are we all clear? To decide if a property is a good deal as part of due diligence for buy and holds we want to know what the QV valuation is and if our purchase price looks good we would then go to a registered valuation. Due dilgence for trades involves establishing fair market value for the property, either as it is or after renovations etc. Government valuation is of no use whatsoever for anything, OK?

Again for Aucklanders my valuer is Rene Mclean. He is amazing.
Contactable on rene@rapurdy.co.nz.

5. Legal Stuff

In addition to checking the council file you will also need to get a “LIM” (land information memorandum). This document has a lot of the same information that the council file has but often there is stuff in the LIM not in the file. You can order them yourself from council but I recommend getting your solcitor to order it and check it as it often has legalese in it. At the same time your solicitor would do a title search. This is to check that the vendor is in fact the owner and that there are no caveats or other nasties on the title. Again this is something for your solciitor to look over and advise on. There may be maori land claims or mortgages registered against the title etc. This is always a legal issue and not something you would sort out yourself.
So in summary this is the basis for all good due diligence.

Get the deal under contract and signed: FREE
Ring your valuer for an estimate: FREE
Confirm estimate with an online valuation: $30
Check property file at council: From FREE to about $60

All right so far you have less than $100 invested in your due diligence. You know what the property is likely to be worth and whether there are any obvious issues with the property.  I didn’t list it above as it should be obvious but you would also get a rental assessment at this point to confirm what the yield would be. So at this point this is either stacking up as a lemon, in which case you walk. Or it is looking like a deal so you..

Do the legal stuff: $200ish
Building inspection: $500
Registered valuation: $500

Total investment in DD around $1300 but [First Name] you have enough ammo now to get seriously negotiating the price if necessary.

So next month I’m going to teach you how to negotiate the deal. How to use DD info as part of negotiation and why the final purchase price is never set till settlement day.

Thanks again for taking the time to read this. I hope it helps.

Finally keep an eye out for your inbox this week. I have an opportunity in the South Island from a developer friend and one final opportunity to get in on my Fiji deal for only 25K.

Stay safe!! Dean and Raewyn at Massiveaction