Don't Buy A Lemon
It’s a sour deal when you invest hundreds of thousands of dollars in a property that ends up being a lemon.
It’s buyer beware in real estate, but how do you protect your interests when you’re not an expert on building structure, compliance issues, timber pests (including terrible termites) and energy rating matters?
This fact sheet provides valuable tips on how you can avoid buying a lemon.
1. Never buy without having your own professional property inspection completed.
A report only costs a fraction of the purchase price—much less than 1%—but provides priceless peace of mind.
If you’re buying in the ACT you’re not legally obliged to get your own property inspection. You’re given a copy of the seller’s report and can rely solely on it if you wish. However, there is nothing stopping you from sourcing your own, independent report and comparing it to the one you receive through the seller. It’s a valuable second opinion.
If you’re buying in NSW there is no legal requirement for either seller or buyer to organise a property report before a purchase. However, having your own report is the only way to be sure you’re making the right investment.
|2. Select a reputable, qualified property inspection company to conduct your inspection.||
Not all property inspection companies are equal.
If you’re buying in the ACT beware that the only thing a property inspector needs to operate is professional indemnity insurance. They don’t need a licence, professional qualifications, accreditation or even any building industry experience. See Surety Property Report qualifications.
If you’re buying in NSW beware that property inspectors don’t even need to be insured to operate, and many aren’t.
|3. Remember the vested-interest factor.||
When sellers engage the services of a property inspection company they, not you—the buyer—are the client.
Sellers have a vested interest in a favourable report that maximises their sale price and doesn’t prevent their sale. Also, there’s no requirement for sellers to improve their property based on report results—they don’t have to act on any defects.
The most professional, experienced property inspectors operate with integrity and write detailed accurate reports regardless of who engages them. See Surety Property Report qualifications.
|4. Take all property inspections seriously, reading from top to bottom.||
In the ACT, sellers must legally provide buyers with a copy of all property reports produced for the purposes of sale (usually through real estate agents). It’s then up to you, as the buyer, to read the report and decide whether to a) continue with a proposed purchase, b) negotiate a price that takes into account issues outlined in the report.
Here’s the catch: Some buyers see property reports provided by the seller as a mere formality and so they don’t take them seriously.
It’s buyer beware if you don’t want to get a sour deal. You absolutely need to read all reports from top to bottom. It’s the only way to be sure where you stand. And, if you’re not 100% confident, get a second opinion through your own independent, property inspection company. Buyers get mechanics to check over used cars and people with health issues often get a second opinion before deciding how to proceed. Why wouldn’t you with a major investment like property?
See Surety Property Report qualifications.
|5. Discuss the contents of the report with the property inspector, to ensure you understand all contents.||
Don’t be shy. You’re not a technical expert in property, compliance, nasty timber pests like termites or energy ratings, so pick up the phone—or arrange to meet with your property inspector—and go through the report together. It’s a sure way to be confident you understand all the detail.
Alarm bells should ring if the property inspector won’t meet or talk to you. This is not a good sign.
|6. Discuss the contents of the property inspection reports with your solicitor.||This is another way to build your confidence and avoid buying a lemon, especially on detailed, complex compliance issues. Your solicitor is there to give you, as buyer, independent advice—or point you to others who can help.|
|7. Source indicative quotes on repairs.||
Just because a property inspection report points to flaws (minor or major) it doesn’t mean you shouldn’t proceed with the purchase. But you should do so fully informed and that means buying only after you have an idea of how much it could cost you to fix defaults.
|8. Act on the advice in the report.||
Don’t rely on any report that hasn’t been prepared in line with Australian standards. This means explaining:
This information is important—if the report recommends further advise from an engineer, for example, or a timber pest control expert or electrician, make sure you act. Otherwise you could well get caught by surprise and be up for a lot of unexpected repairs. And it’s the only way to be fully informed on the potential costs of fixing a problem.
|9. Australian standards for building and timber pest inspections.||
If you’re buying in the ACT be aware that ACT legislation requires all property reports to be prepared in accordance with the Australian standard. Is this requirement met 100% of the time? It’s not.
Every seller in the ACT who engages a property inspection company should receive a copy of a pre-inspection agreement also in accordance with the Australian standard. However, there is no requirement for the seller to share this with you, the buyer—you’re not the client, after all.
If you engage your own property inspection company, however, you get to see this important agreement.
If you’re buying in NSW there is no need for property inspectors to be licensed, insured and no requirement for them to inspect in line with Australian standards—absolutely no need.
Surety Property Reports inspects 100% of the time in line with Australian standards.
|10. A slow market is no reason to drop your guard||
When buying in a slow market you need to be extra careful. Some sellers have listed their properties because they need ‘to get out’ of financial difficulties. They may not have been paying much attention to maintaining their property and may not be willing to rectify any defects noted in their property inspection report.
This means you, as the buyer, could end up with the sour deal. And it could cost you thousands. Always have your own independent property inspection done—it’s the only way to be sure, including in a ‘buyer’s market’.
See the Australian Property Investor story (June 2011): ‘A slow market is no reason to drop your guard.
Property inspection reports: read every word
A Canberra purchaser paid close to $1 million for a property, only to discover they couldn’t move in because of termite damage. They received the property inspection report, but treated most of the content as a ‘tick and flick’, given it was prepared for the seller anyway. Like many others living in Canberra, they didn’t believe termites were active in the ACT and so skimmed over that section of the report.
Then came the nasty surprise that the property had extensive termite damage, which was going to be mighty expensive to fix. So far the bill is close to $50K and it would have been a lot more except a relative, Murray Eastman, had ‘mates’ in the building trades who volunteered to help tear down gyprock, deal with the termite damage and then rebuild.
“My advice is to take property reports very seriously and remember that they aren’t just a formality,” says Murray. “Even if you have access to one through a seller, still get a second opinion for yourself, as buyer. If I ever buy another property I will.”
It’s a wise investment to have a property professionally inspected before you buy. But buyer beware—not all property inspection companies have accredited inspectors with years of experience in all aspects of the building industry. And, just like any industry, some operate at best practice level and some don’t. To be sure you get an expert opinion, ask these questions before you sign on with a property inspection company:
- What building qualifications do the inspectors have?
- How many years’ experience and are they accredited?
- Does the company belong to professional associations, such as the Master Builder’s Association and the Housing Industry Association?
- How long will the inspection take (1.5 hours as a minimum—some inspectors are ‘in and out’ in less than 0.5 hours).
- Will the report’s contents be explained to you by the inspector?
- Will the report include evidence of findings, such as photographs?
- How will serious problems be highlighted?
- What type of insurance does the property inspection company have?
- Does the company have a good reputation and track record in the industry?
There is no doubt in Jerry Howard’s mind. As Deputy Executive Director of Australia’s Master Builder’s Association of the ACT, Jerry says buyers absolutely need to organise their own, independent property report before they buy—someone acting solely with their interests in mind.
‘When buying property, people are making the greatest investment in their lives, worth hundreds of thousands of dollars,’ says Jerry. ‘They need to spend a few hundred dollars to get their own property reports done before they buy, and then get the inspector to explain its contents. Most people get a mechanic to check a used car before they buy, but they don’t with a property they’ll be paying off for 25 years or so.”
In the ACT, legislation dictates that sellers have to have property inspections done before they can even list and market a property for sale. Potential buyers are given copies of the reports to consider (usually through the real estate agent) and then, when the property is sold, the buyer pays the seller for the cost of the reports. Sound straightforward? Not really.
Jerry says the reality is that a property inspection company is being paid by the seller to prepare the report, and protect their interests not the buyers. “The vendor engages the inspector and most vendors want a report that favours their sale. It’s not necessarily an independent report. In addition, many reports tend to be full of disclaimers, or phrases like ‘appears to be OK’, so no one can be held liable for anything. This minimises the value of the report.”
Another issue is the quality of the inspectors. “There are some good companies out there,” says Jerry, “But the industry is not legislated and not all inspectors are accredited or professionals with years of direct experience in the building industry. In the ACT, all you need is professional indemnity insurance to become an inspector—no other qualifications. And many companies have a short pro forma they use to inspect, which takes little time to complete. Others produced detailed, comprehensive reports.”
Jerry says if you want an expert opinion, you need to go to an expert. ‘You don’t ask the receptionist at a doctor’s office on the way out the door, after your appointment, if the doctor is qualified. You want to know going in.’
The MBA receives complaints from buyers concerned about property inspection report quality. And Jerry says he’s seen it all. Reports that don’t record building material correctly, miss poor site drainage issues or fails to note a roof that needs major repair. ‘The next thing you know the buyer can be up for major remedial repair work worth tens of thousands of dollars,’ says Jerry.
Jerry is not suggesting that buyers don’t proceed with a purchase just because a property report lists defects—especially if the property is what they really want: ‘Most people want a frank and fearless report so they know where they stand. If they want to purchase, with “warts and all” that’s fine, as long as they have the knowledge before they sign on the dotted line.’
In the ACT, sellers have to have property inspection reports completed before they can put their property on the market—unless the property is a unit. Then the only legislated requirement is to have an energy rating report completed.
Jerry Howard, Deputy Executive Director of the Master Builders Association of the ACT, says it’s an ‘oddity in the system’, especially since more and more young home buyers, first time buyers and property investors are buying units.
How do you protect yourself from buying a lemon? Have your own independent property inspection report done, by a professional, accredited expert (see also Finding the right property inspector).
Bruce Cohen, Director of Surety Property Reports—a property inspection company that is unique because it focuses on buyers—says it’s critical to have the full facts before buying a unit, no matter what price range, especially since problems in common areas can end up costing you a lot of extra money.
The issue is of such concern that the ACT Government’s Environmental and Sustainability Directorate (formerly ACTPLA) recently conducted a review into the quality of construction of unit complexes in the ACT. This was as a result of a number of consumer complaints lodged to the department.
Another issue, says Bruce, who is an MBA Accredited Building Consultant as well as a property inspector, is the reality that builders are increasingly challenged to deliver quality construction with rising building costs in a competitive new home market. Even respected builders can have variations in quality. Most builders are concerned that errors and poor workmanship with the costs of associated re-work may destroy their reputation, but there have been horror stories about cutting corners with the buyer left with the problem.
“So it’s up to you, as buyer, to ‘take care and beware’”, says Bruce. ‘You need to be confident in your investment. The Surety brand evolved from our conviction that buyers, sellers and property owners all need—and have the right to demand—transparency and accuracy from building and timber pest inspection reports.’
With units having your own property inspection completed is especially important because of the common areas of the property, which can attract unwelcome special levies.
It’s also wise for buyers to consider getting a strata report, which will outline the history of the property and any current or previous major problems with the common areas of the building. We recommend organising a strata report in addition to a building and timber pest inspection. Another wise tip from Bruce is to review the Sinking Fund in detail so you’re aware upfront about any proposed special levies or proposed increase in fees.
‘We had a client who bought in a complex for which an electronic front security gate was being installed, worth more than $45,000,’ says Bruce. ‘She wasn’t aware of the special levies involved and ended up having to pay more than $4,000 in extra—and unexpected—costs. It really pressured her financially and took her over her initial budget.’
‘Let’s face it,’ continues Bruce. “Property reports aren’t worth the paper they’re written on if they’re biased. They need to be accurate, honest, detailed and easy-to-understand. They’re developed to protect, not hinder. And the risks are big if your report isn’t true to the state of the property—especially for buyers left living with the problems.’
Surety, by definition, instils confidence, security and trust. ‘Without that you have no guarantee,’ says Bruce.