When purchasing a residential property, whether for your use or as an investment, a “due diligence” exercise is an absolute must before you sign the sale agreement. Due diligence is the investigation of care that a reasonable business or person is usually expected to take before entering into any agreement or contract with another party and comprises a physical audit, a legal audit, and a financial audit.
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Below are all three audits to ensure you’re well equipped to make an informed decision before embarking on this exciting journey.
As part of a physical audit, you would have to identify all the positive and negative features of the property. For example, does the property have a gourmet kitchen, or is it dysfunctional; does it have sea views or a poor outlook; is the internal décor tasteful or are the walls painted pink and purple?
Your physical audit should focus on the following three groups:
- Group A – Likes / advantageous features.
- Group B – Dislikes; are repairs and renovations required, and does the property require extensions? Are repairs, renovations, and extensions possible with the necessary spending? (These are within your control).
- Group C – Dislikes, disadvantages, annoyances, functional and economic obsolescence that no amount of money will improve / repair / replace (These are out of your control).
Group C is the most important and possibly the “game-changer” because it is the main contributor to whether your property appreciates or depreciates over time. For example, the building orientation – A north-facing building is best for light and efficient heating or cooling in the southern hemisphere. Stormwater control – avoid being below road level, large or high embankments and retaining walls (especially on boundaries shared with un-cooperative neighbours), noise and visual pollution (opposite school, on busy/steep roads).
Secondly, a legal audit identifies the limitation of your “real rights” on the property. When conducting the legal audit, you should obtain the following information:
- Title deeds and Surveyor General diagrams show servitudes on the property (below-ground pipelines and power lines), road reserves, restrictive conditions of title indicating legislated restrictions – usage, conservation areas, and water rights.
- Town planning controls would show the maximum allowable development of the building or floor area. Are there any height restrictions, building lines, proper usage (see municipal websites), land conservation (e.g., Durban Metropolitan Open Space System – DMOSS), or building conservation (AMAFA)? Also, local authorities approved architectural plans and encroachments by the neighbours or affecting the neighbours.
- Consider the rules and regulations of a Body Corporate or a Homeowners Association on some properties. You must ensure that the sectional title plans are available and up to date, security of tenure over exclusive use, parking bays, storage, and gardens. You must also obtain copies of the Body Corporate meeting minutes to familiarise yourself with the management of the complex or estate.
- It is also essential to see whether the Body Corporate adheres to the Sectional Title Schemes Management Act Regulations 2016 requirement, such as holding sufficient reserve funds to cover budgeted repairs and maintenance costs in any financial year.
Lastly, you must conduct a financial audit which will include items such as:
Municipal rates – are there any accounts in arrears or an over-valued property that would result in higher rates payable?
Are there any arrears or anticipated special levies (usually because of inadequate financial planning)?
It is essential to obtain Body Corporate financials to study the financial status of the Body Corporate as well as the competency of the management of the complex, as any shortfall in funding for major repairs will result in unexpected special levies.
In conclusion, investing in property must be an exciting journey, but property purchases must follow a sound and logical research process instead of emotional impulse! So, enjoy the journey because you are now equipped with the right knowledge to start the due diligence process to ensure a sound and exciting property investment!
Writer : Rob Roper
