When purchasing a residential property, whether for your own use or as an investment, do a “due diligence” exercise before signing that sale agreement.
Due diligence is defined as the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party and comprises a physical audit, a legal audit, as well as a financial audit.
As part of a physical audit, one would have to identify all the positive and negative features/characteristics of the property, such as whether the property has 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.
This list must be separated into three (3) groups:
- Group A – Likes / advantageous features.
- Group B – Dislikes, repairs and renovations required, the necessity for extensions – but where all are possible with the necessary spend (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 not in your control).
Group C is the most important one and possibly the “game-changer” in that it is the main contributor to whether your property appreciates or depreciates over time. For example, the building orientation – north facing is best for light and efficient heating or cooling in the southern hemisphere; stormwater control – avoid being below road level, avoid abundant or high embankments and retaining walls (especially on boundaries shared with un-cooperative neighbours), as well as noise and visual pollution (opposite school, on busy/steep roads).
A legal audit identifies the limitation of your “real rights” on the property. This information is obtained by researching the following items:
- Title deeds and Surveyor General diagrams that show servitudes on the property (e.g., below-ground pipelines and power lines, etc.), road reserves, restrictive conditions of title indicating legislated restrictions – usage, conservation areas as well as water rights.
- Town planning controls would show the maximum allowable development of the building or floor area, any height restrictions, building lines, the permissible usage (see websites of municipalities), conservation of land (e.g., Durban Metropolitan Open Space System – DMOSS), conservation of buildings (AMAFA), local authority approved architectural plans and encroachments by the neighbours or affecting the neighbours.
- The rules and regulations by a Body Corporate or a Homeowners Association will have to be considered on some properties. The buyer would have to make sure that the sectional title plans are available and up to date, security of tenure over exclusive use, parking bays, storage, gardens and so forth. It is also advised that the buyer obtains copies of the Body Corporate minutes of meetings to familiarize themselves with the management of the complex or estate.
- It is also important 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.
A financial audit will include items such as:
- Municipal rates – more specifically any arrears or is the property over-valued which would result in high rates payable.
- Body Corporate levies – are there any arrears or anticipated special levies (usually as a result of inadequate financial planning).
- It is important 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 can be an exciting journey but it requires that property purchases are based on sound and logical research as opposed to emotional impulse!