HOMETOPIA insights


Revealed: The Hidden Costs of Due Diligence

There's nothing romantic or magical these days about buying your first home. In fact, it's difficult not to come away from the process feeling bloodied, cynical, bitter and poorer.

It seems that everything is stacked against first time buyers. The new LVR restrictions impact upon them, with their limited, early-career incomes, more severely than any other group.

The 20 per cent LVR restrictions mean that to buy a $500,000 home, most first time buyers will need to save at least $100,000 for the deposit. Every dollar spent on seemingly prudent due diligence checks - building inspections, valuations, council files - eats away at that hard earned deposit and in effect costs them five times that in reducing their total buying budget. That wouldn't be too bad if homes had asking prices, because then due diligence costs would only be incurred once buyer and seller had reached an agreement on that most significant of factors - price.

It is not unusual for a first time buyer to be in five auctions before being successful.

An average building inspection costs $600 and the same for a valuation (often mandatory as a condition of the home loan for first timers). So, after five auctions they will have spent a total of $6000 on due diligence ($4800 of which turned out to be unnecessary). Let's say for every home auctioned there might be, on average, five would-be buyers. If they each do the required inspection and valuation checks, (four of which will be money down the drain for each property) that's a total of $6000 per home auctioned. On the basis that each buyer might participate in five auctions, that means a total expenditure of $30,000 and a net reduction in the amount available to actually buy homes of $150,000.

Not surprisingly, it's not a building inspector or registered valuer who is writing this. The popularity of auctions as a sales method has been a field day for these service providers. The system, as it stands, is sucking money away from buyers, who are unnecessarily duplicating expensive due diligence checks and reducing funds available for actual home buying, while house prices continue to spiral upwards.

Some will argue that market forces should be allowed to operate freely. I disagree. The purpose of government is to intervene when inequities exist and protect the vulnerable and disadvantaged, particularly when the eventual outcome of not acting looks like reducing the home owning aspirations of many.

In an ideal world there would be no leaky buildings or badly maintained homes, banks wouldn't force cash-strapped first buyers to commission expensive valuations, all homes would have an asking price and councils wouldn't charge through the nose for photocopied LIM reports.

But it's not an ideal world, and houses will continue to be sold by auction, but surely we can find a solution to poorly funded buyers each commissioning multiple due diligence checks on the same home.

One solution would be to require all homes being sold by auction to provide a minimum level of due diligence documentation (building inspection, moisture test, automated valuation,) funded partly by the seller, as part of the sales cost and accessible to all interested buyers at a minimal contributing cost. The reports would be commissioned and managed by a non-partisan third-party to ensure no buyer/seller prejudices.

This would, at a stroke, end this waste of buyer funds and ensure that all buyers have access to important due diligence matters especially against a background of leaky homes, where a poorly informed purchase could have devastating consequences.

As featured in the New Zealand Herald 22 March 2014

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