Buying a property is one of the biggest decisions you’ll make in life, and so it’s important to discover everything you can about the asset before taking the plunge.
Undertaking a process of due diligence is essential in order to avoid some of the common pitfalls that befall people when making this significant financial investment.
This includes understanding the arrangements in place if the property is currently occupied by tenants, conducting investigations into the building’s state – including the integrity of the structure, pest and pool inspections – and any restrictions on possible future development of the asset. This article examines a few of these in brief but it’s always advisable to seek the advice of an experienced legal professional when embarking on the due diligence process before buying a property.
What you need to know if the property currently has tenants
So you’ve found the property you want to buy but the current owner has tenants living in the house. If your plan is to buy the property as your residence, there are some important things you’ll need to know before signing any contract of sale.
Most important is finding out the terms of the tenancy agreement between the tenant and the current owner. In general, tenancy agreements are periodic or fixed term. A periodic tenancy agreement means the tenant rents the property for an indefinite period, compared with a fixed-term tenancy where the tenant agrees to rent the property for a certain amount of time. Once the fixed-term period ends, the agreement often evolves into a periodic agreement unless the landlord and the tenant agree to negotiate another fixed-term deal.
As part of your due diligence on a property, you have the right to find out what type of lease the tenants of the house have. If it is a periodic lease, you can request ‘vacant possession’, that is, that the landlord ensure the property is vacated. In Queensland, the property manager/owner must then give the tenant a Notice to leave (Form 12). The tenant must be given at least four weeks’ notice from the signing of the contract of sale.
If the tenant is on a fixed-term agreement that has not expired when you are planning to buy the property, the tenant is entitled to remain in the property until the end of the tenancy contract. It is possible to privately negotiate with the tenant to see if they will agree to end the lease early, and you may also offer incentives such as helping them with moving costs in order to facilitate the move, but ultimately the decision rests with the tenant.
If you plan to purchase the property and remain as landlord, it’s important to be aware of not only the tenancy agreement in place, but also the tenant’s track record in looking after the property and payment of rent, plus any outstanding maintenance issues which should be dealt with before the transfer of ownership.
Property inspections and other matters to check before purchase
While you may instantly love the look and location of a property, put your positive emotional reaction to one side while you do a sober assessment of whether there are any issues which might make you later regret committing to the purchase.
This means engaging building and pest inspectors to make an assessment of any structural defects, pest infestations, faulty wiring, plumbing and drain issues, asbestos, lead paint, and more.
Other things to double check include existing mould; any areas that have fresh paint applied to them; sagging ceilings; the fit of doors and windows; the pressure flow and temperatures of taps and toilets; the condition of floors under carpets; the plumbing under sinks; the hot water system; lights and fuse box; roof, guttering and drains; and exterior walls for cracks.
It’s advised you conduct these inspections a reasonable time before you sign any contract of sale and again before the day of settlement to ensure that nothing on the property has changed since the first inspection.
Legal considerations in buying a property
Check the sort of title the property is held under. While freestanding houses in Australia are generally held under freehold Torrens title, if you’re buying a unit, townhouse or villa, it may be under strata title.
Buying a strata property means you will be subject to the scheme’s bylaws and need to pay regular levies for maintenance and other expenses.
An experienced solicitor can check on property title for you, and also check that the seller’s contract for sale include all the things you need to make a fully informed purchase decision. This commonly includes any zoning certificates, land plans, and drainage diagrams, and a Certificate of Title that confirms the current ownership and whether there are any encumbrances on the property.
Encumbrances are restrictions placed on a land title. They might be placed on the property by the local council, land zoning, or other reasons. An encumbrance can include a registered interest in the property by a person who is not the landowner.
Easements, covenants and caveats are all types of encumbrances that you should be aware of before you buy a property. A negative easement, for example, may prevent you doing anything to the property that obstructs a neighbour’s view. A covenant may prevent the use you can make of the land, or the type of material you can use to build.
The importance of legal advice
As can be seen there are many things to consider before you sign on the dotted line to purchase your dream property. It’s always best to get the detail of a property purchase right from the outset lest you later end up in a costly administrative nightmare as various problems are gradually revealed.
McNamara Law provides understanding, expert legal advice on all conveyancing and real estate matters, and can help you avoid the common mistakes people make when they see the property they wish to buy. Contact us today on 13 58 28 for an initial consultation on any property-related matter.