If you buy a $10 item of clothing that turns out to be faulty, you can usually get a refund or replacement fairly easily. Buy a faulty home worth hundreds of thousands, however, and you are often stuck with your problems.
Around Australia, the purchase of residential property is a dream come true for many.
Before signing contracts, however, experts warn there are a number of things about which to be wary.
In a recent blog post on her company’s web site, Stacks law firm lawyer Anneka Frayne warned of numerous potential traps for buyers.
First, there is contaminated land. In one case, Frayne says buyers who purchased a regional property where a house had been demolished after a fire discovered asbestos contamination costing tens of thousands in rectification only when they went to build a new home. In another case, contamination due to an oil spill by a previous owner was discovered only when council came to inspect the land following the lodgement by the new owners of a development application to change the use of the land.
As well as asbestos or oil, Frayne says contamination can occur where there has been a sheep dip, chemical use, or petrol station previously on the site. In such cases, she recommends obtaining a contamination investigation and report.
In both of those examples, Frayne says the purchasers failed to get a building and pest report prior to exchange of contracts. This, she says, is a mistake. As well as issues relating to contamination, these reports can identify hidden structural problems which may involve tens of thousands of dollars in rectification.
Beyond that, some vendors refuse to agree to contracts unless buyers agree to waive their cooling off period. Buyers who encounter this, Frayne says, should seek legal advice.
Finally, Frayne warns against misrepresentations by agents. On one occasion, an agent told buyers that the sellers had agreed to a reduction in price after a significant structural defect was discovered prior to settlement. In fact, this was not the case and the buyer had not agreed to any reduction. In another case, the purchaser of a large block of land went ahead on assurances by the agent that the property had town water. After settlement, it was discovered that this was not the case.
Others agree about the need for caution.
Melbourne Gunning, president of the Real Estate Institute of Australia, agrees with several of Frayne’s points and adds more of his own.
Prior to exchanging contracts, Gunning told Sourceable that it is critical for buyers to conduct due diligence.
First, it is important to look at any issues or problems which are not being disclosed.
The first part of this involves property boundaries. It is critical, Gunning said, to arrange for a survey to be done to ensure that your fences are on the property boundary and that the dwelling meets setback requirements. This is often a problem, he says, with large terrace houses.
As well, it is important to be clear about what easements are in place. An easement is a section of your land which someone else has the right to use for specified purposes, such as a shared driveway.
Under no circumstances, Gunning says, should you purchase a property without having conducted a survey.
Gunning agrees with Frayne about the importance of building and pest inspections. These, he says, will help identify any pest infestations or issues with the dwelling from a structural perspective.
It is important to recognise, he says, that the building inspection report will never present a complete bill of health. Inspectors, he says, are looking for faults so as to enable purchasers to quantify the impact of these and either walk away, negotiate a discount or obtain compensation.
As for contamination, Gunning says this is rarely an issue with residential properties but may arise where there have been oil spills from a workshop out the back. Accordingly, he says it is important to enquire about how any garages of sheds have been used at the back of the property. In old homes as well, there may be issues as common practice in days gone by was to simply tip oil into the back of the house.
There may also be issues, Gunning says, where residential areas are adjoined to industrial areas. Where there has been a panel beater or a workshop, he says, contamination may have leeched into the backyard of residential properties. Buyers looking at these properties may wish to have this investigated.
Next, floor plans should be cross checked for measurements and dimensions. This can be done by building inspectors, Gunning said, who can ascertain whether or not measurements are roughly correct via laser measurements. Where the actual dimensions of the dwelling do not match those stated in the plans, Gunning says buyers could wind up paying for an apartment which is 110 square metres when in fact it is only 105. Those who uncover this, by contrast, may be able to negotiate a lower price.
On this, Gunning cautions against relying on the dimensions of the property as shown in the strata plan. These are often drawn up prior to practical completion and may not constitute an accurate reflection of the actual property, he says.
On Frayne’s point about misrepresentation, Gunning says most agents are honest but rely on information provided to them by sellers, some of whom may intentionally fail to disclose issues about which they do not wish perspective purchasers to know. These could occur in relation to a range of matters such boundary issues, defects, measurements, availability of NBN or the property being potentially in a flood area.
In one case, Gunning says the seller of a Northern Beaches property intentionally included a zoning certificate which was 18 months old. After the contracts had been exchanged, the seller inserted a new version of the certificate which showed that the property had potential overflow issues from water which ran off roads during flooding.
As well, it is important to carefully read zoning regulations and be certain about what can and cannot be done on the property and what restrictions exist.
Whilst the above represent the main issues from a diligence perspective, Gunning also says there are other things about which prospective purchasers should be aware.
First, there is GST, which usually applies to the sale of new homes or commercial premises. Previously, developers would themselves simply remit this to the ATO though their regular business activity statement. Under new laws designed to combat phoenixing, however, this has changed and the GST is now remitted directly by the purchaser.
In the case of residential purchases, Gunning says the price will be quoted on a GST-inclusive basis (i.e. after GST) and thus the purchaser will generally have no more to pay other than the price quoted. Thus, if a buyer pays $1 million for a new house, the buyer will pay the pre-GST portion of the sale price (approximately $909,000) to the developer and will remit the GST portion ($91,000) directly to the ATO.
In practice, he says this is handled by the purchaser’s lawyer and happens at settlement. Thus purchasers themselves rarely need to worry about this.
What buyers should check, however, is that the price in the contract correctly includes the GST component and represents the entire price which the purchaser will need to pay (as should legally be the case).
Next, there are amounts owing on the property for issues such as land tax, capital gains tax as well as foreign investment clearances (in the case of foreign buying). Typically, Gunning says, these things will happen as a standard procedure during settlement and are relatively straightforward. For buyers, these rarely pose problems provided that they receive good advice.
That, Gunning said, underscores the importance of sound advice from a good lawyer. Whilst conveyancers generally do a satisfactory job on relatively straightforward transactions, he says a good lawyer is crucial when trouble strikes.
Above all, he stresses the need for buyers to do their homework.
“Don’t rush in,” he said. “Spend the money and do your due diligence.”