Tony Brazier

www.braziers.co.nz

Tony Brazier

The Press - Tuesday 9 June 2009

Due Diligence and Confirmation

After you have signed up for a property and been told your offer has been accepted it is very natural to have doubt and negativity set in. We call this “buyer’s remorse.” It is a natural defence mechanism when entering areas of unfamiliarity. It goes away when you make yourself busy with your due diligence or “homework” to be done before confirming the purchase.

Firstly, see your solicitor. They should receive a scanned or faxed copy on the day the agreement is signed so that they can order the documents to be checked. In most instances for investment property this should include Title, LIM (Land Information Memorandum, from the council), Lease/Tenancy Agreements and relevant issues within the Resource Management Act. By the time you’ve made an appointment these items will be still on their way and so not yet checked. The reason to visit early is more to ensure the agreement’s other conditions and time-frames are possible to meet. Most agreements give ten working days or more, as organising property inspections, valuers, and money can require a sequence of events that require liaison between the parties and cannot be hurried. For example, allow time for the salesperson to arrange through the tenants for a valuer to inspect in plenty of time to write his report to deliver to the banker to get approval from head office. Any one of these processes can be disrupted easily.

The second reason to visit your solicitor early is to discuss how this purchase fits in with your present tax, security and gifting structures. You may need to discuss buying in a different entity or to set one up eg. a family trust, LAQC or for the more advanced, a trading trust. Your solicitor may need time to endeavour to negotiate with the other side if your agreement needs tweaking in order for you to confirm confidently. In other words don’t leave things to the last minute by meeting with your solicitor for the first time on confirmation day.

Another item you may need to adhere to strictly is access rights. Whether you have asked to renovate and re-let an empty unit before settlement, or asked to take possession prior to settling yourself, it is imperative that the scope of access is clearly laid out. This will include the exact work to be done, by whom and to what standard. It will show who has the responsibility to approve tenants and who gets the money from the rental. The purchaser is wise to ask for conditions that will allow the property to be renovated in full by settlement, but the vendor is wiser to cover himself against being left worse off if the settlement never occurs.

All solicitors will advise strongly against any opportunity to hand over keys to a property before settlement. There are good reasons for this, notably the difficulty in getting an occupant out if they don’t settle. Most commonly this is covered by signing a lease agreement with the purchaser to move in as a tenant, (until settlement has occurred,) that way the Residential Tenancies Act can be used to remove them at the expiry of the tenancy (ie, settlement).

Once your due diligence is done and you are ready to confirm try not to re-negotiate the agreement as part of your confirmation, (do it earlier if necessary). Although in a strong position at this stage, vendors don’t appreciate surprises at the last minute and often knee jerk with a cancellation. More importantly, if you are serious about a long property investment career, avoid getting a reputation for doing this as salespeople, who represent the vendor, will stop calling you with possible purchases if they know you will likely mess their vendor and them around.

If at all possible, put in an original due diligence timeframe that avoids confirming on a Friday. Most solicitors will be busy with settlements of houses on a Friday (to move in Saturday) so don’t bog them down when any other day will do.

Lastly during your inspections of the property take photos of chattels you’ve negotiated to stay, work you’ve asked to be completed and/or rubbish you negotiated to be shifted. These photos are handy for your last inspection just before settlement.