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Making an Offer: Due Diligence


VERONICA'S BLOG Episode 4 - Follow this expert advice about the importance of due diligence before making an offer.

Adam & Monique were keen to do something I wish all first time buyers would do. They were prepared to buy a property that needed work and create value with some elbow grease.

So we found them a house that looked just the ticket. It wasn’t really liveable in its current state, but on the surface it looked like it offered a great opportunity for immediate cosmetic improvement, as well as scope for further renovations down the track.

The property we found was going to auction and my advice to these young buyers was to get their due diligence completed before deciding whether or not to make an offer prior.

Adam and Monique went away with their homework list and started getting a bit impatient and were keen to make a bid quick smart. It was great news that they were excited enough to make an offer BUT I wanted to clear a few things first. Plus I was worried that they were prepared to pay too much for this property.

Once you find a house to buy, it is important that you have a building and pest inspection done, even if you are intending to renovate. This is because there can be hidden problems that can turn into big money pits.

As first home buyers, they were very open to taking advice from professionals. And it is important that buyers get the right advice from the right quarters. In this instance their mortgage broker was giving them some tips, which turned out to be inappropriate for an auction campaign.

Firstly, he was suggesting that they try to buy the property with a 5-day cooling off period, as you normally would with a private treaty sale. Now, it is next to impossible to buy a property prior to auction with a cooling off period – you have to buy under auction conditions, which means no opportunity to change your mind once contracts have exchanged.

Secondly, in a competitive market it is very dangerous to make an offer when you are not in a position to exchange contracts immediately. At the time we were looking for Adam & Monique, the first home buyer segment of the market was hot as there was a looming deadline with government incentives about to dry up. If we were to get an offer accepted, we then have to wait however long for the bank to do their valuation.

Because the property would still be on the market while they got unconditional finance approval, in the time between their offer being accepted and the valuation being done, another buyer could come in with a higher offer. It is a cruel reality that gazumping is not illegal in NSW.

Also, if the valuation does not match the offer and the buyer does not have sufficient funds to cover the shortfall, they will not be able to proceed with the purchase.

Lastly, I had been doing some research on recent sales and believed that they would have been paying too much at the level that they were talking. The bank valuer would also have access to the same information and would no doubt draw the same conclusion.

My advice was to wait and discuss after they have the building inspection report. In the meantime, I kept in touch with the agent to keep abreast of interest levels from other buyers.

The results of the building and pest inspection showed more asbestos than expected, so Adam and Monique got an expert in to quote on the removal, which came in at a whopping $40K, drastically altering the price they would be prepared to pay. In the end they decided not to proceed with this property as it really required more work than they had intended to do.

Thank goodness they hadn’t gone in all guns blazing with that early offer!

And in the end it sold for only $2000 more than the limit I suggested they set. Sometimes the best outcome is not to buy the property.

If you would like to read more of Veronica's insights on the property market, particularly in her own backyard of inner Sydney, go to Veronica Morgan’s blog.


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