Whilst putting together a document recently on the due diligence processes undertaken as part of assessing a potential development site, I got thinking about the due diligence process
which should take place prior to purchasing a dual occupancy property. As such, I thought I’d put together a brief blog based around dual occupancy due diligence.
In my research for the document I came across a few definitions of due diligence, but I found the following paraphrasing of a definition a helpful explanation: due diligence is the process a person would undertake to avoid harm to another person or situation.
So from the above explanation, undertaking a dual occupancy due diligence exercise at a new purchase is aimed at avoiding any potential harm to the purchaser or the environment. Due diligence is fundamentally an exploration, and a successful exploration in this instance should ensure the creation of a dual occupancy property which returns both capital growth and income to the investor, whilst not causing any undue damage to stakeholders, local communities or the environment.
The due diligence that takes place regarding the investment potential for growth and income returns can be very varied and is open to a great number of methods and differences in opinions. As such this won’t be discussed in this post, and will be the focus of a separate article.
There are many different processes and actions which make up the successful purchase and completion of the build of a dual occupancy property. Due to the different components and parties which make up a successful new dual occupancy build, there are many different parts which require analysing some of which are as follows: – Local Area Analysis, – Capital Growth prospects, – rental yield appraisal, – land analysis, – Council requirements, – completed product valuation, – financing processes, – careful analysis of the builder and developer. To go into detail on each of these would make for a very long discussion, so I am going to keep the article short by discussing the due diligence that should take place for a dual occupancy property purchase regarding the analysis of the land and the builder.
Land Due Diligence:
I’ll begin by looking at what checks and analysis should take place around the land component of a dual occupancy purchase. Firstly, can the dual occupancy be built on the block of land? This means that you will have to look at what the local Council requirements and building codes are for dual occupancy properties. For example, if the property is in Logan City Council; where we have done many of dual occupancy properties for clients, then it should be code assessable or self-assessable meaning that no additional town planning work is required. However, in some other areas a dual occupancy may require a Material Change of Use (MCU) or even an impact assessable development application (DA).
Is the block ready to build on or is it still in the development phase? It’s worth remembering that a block of land can’t be built on until it is registered with the State Titles Office. When the block is not registered there can be time delays and it is almost impossible to accurately judge the date it will register. This can affect things such as finance, as when purchasing a block using finance you will be required to obtain sufficient finance to complete the contract. The finance may only be valid for 3 months, and if land is going to take more than 3 months to register then finance will most likely lapse and need to be re-obtained. If you are tight on the finance criteria then this could pose a significant risk as you will have been required to enter an unconditional contract status once you have initially met the finance condition clause of the contract.
Once Council has been checked off and you’re sure that the property which is being proposed on the lot can be built it is important to look at the block of land and see what constraints or site-specific factors will need to be taken into account. For example if the block is not flat is there retaining walls required, and if they are required then are they adequately accounted for in the build contract.
Builder Due Diligence:
To begin with you should check the builder is licensed and allowed to build the property that they are offering. Each State will have different building licencing bodies which can do a quick and easy licence check. Queensland’s building industry regulator the Queensland Building and Construction Commission (QBCC) provides an easy licensee check, where you can check that the company holds the relevant licence and that there are no unsettled disputes or complaints lodged against the builder. Checking that the builder has adequate insurance and that there is a body to take over the build if the builder can’t complete build is also important.
Has the builder built this type of product before? This is particularly important for dual occupancy properties. As dual occupancy properties are different to a standard build, it is important to ensure the builder is capable of completing the build on time and within budget.
What is the quality of workmanship from the builder? Remember that a builder’s quality is only as good as the tradesman that the builder employs. It’s important to have a look at some recently completed or under-construction work and look at the quality of the trades that that the builder has been using, as there is a fair chance that this will be reflective in the job that is being undertaken for you.
What is the level of inclusions, and is it adequate for the purposes you have in mind for the property. For an investment property, you will need to ensure that there is a turn-key level of inclusions which will mean that the property is ready to rent out at settlement.
Is the contract that the builder has provided a standard industry recognised build contract? For example, is the builder using a standard Housing Industry Association (HIA) Contract? Is the contract a fixed price contract, and if not then why not? Is there a rock clause in the contract for incidents where the builder hits rock onsite? These are important questions and should be known before undertaking a build project. Knowing the answers to these questions can assist in the mitigation of risk and avoiding cost blowouts and unexpected charges. We only recommend to our clients fixed price contracts that we have studied and had our legal professionals study in detail.
Whilst it’s always important to undertake adequate due diligence on your builder, I believe this is even more important in the case of a dual occupancy build. If the builder is not familiar with dual occupancy properties then they may not be aware of each of the requirements associated with a dual occupancy which are not applicable for a standard house package.
At Capital Wealth Property, we undertake an extensive analysis of the builders we work with, conducting licence checks and inspecting previous workmanship. We only work with reputable builders whom we’ve established long-term relationship with and who we can trust to provide our clients with high quality finished products. The builders that we refer our clients to have completed many successful dual occupancy properties, and have examples under construction that we are able to show our clients through to gauge the quality and design work.
If you would like to speak further about undertaking a dual occupancy due diligence prior to purchase or would like us to recommend a suitable and experienced builder please enquire within.