Before you buy

** Originally published on www.ripehouse.com.au.

Before you buy

Before you buy a property you need to ask yourself two key questions, how will you buy the property and what exactly are you buying? Getting answers to these two questions can make all the difference in a property investment.

Does it matter what name I put on the contract?

Before signing the contract you should work out whether you will buy the property in your own name, in co-ownership, under a company name or using a trust.

Investment properties carry more risk than an owner occupied residence. If you develop the property, or rent it out, and an accident happens that’s not covered by insurance then you could be liable for damages. Similarly, if you run a business or are involved in a risky profession then you are at risk of being sued.

If you are sued, become bankrupt and own all your properties in your own name, then all those properties could be at risk. To dodge this risk and avoid properties being available to creditors, investors commonly own properties in different legal entities. But this doesn’t suit everyone and depends on the purpose of your purchase.

Tax consequences

If you are buying to benefit from negative gearing then there may be sound tax reasons to buy in your own name. However, if you are buying to develop the property for longer term capital gains then another structure may be more suitable.

It’s important to take this into consideration before signing the contract. If you don’t and want to transfer ownership after settlement then you will end up paying double the stamp duty. Furthermore, if you change your mind before settlement, after signing the contract, then there can be substantial costs involved and possibly double stamp duty depending on the circumstances and jurisdiction.

To avoid these issues it’s highly beneficial to get legal and tax advice before you sign a contract.

Why is due diligence so important?

Not every property is what it seems and not every seller is honest. There can be a multitude of issues that that can be hidden from unsuspecting buyers, turning their property investment dream into a nightmare.

The laws relating to disclosure of matters, affecting property, vary from state to state. Even in those jurisdictions that have a robust disclosure regime, e.g. New South Wales, Victoria, South Australia and ACT, the information that sellers disclose can be incomplete or out of date.

If you’re spending several hundred thousand dollars on a property, trying to save a few hundred dollars by not undertaking due diligence doesn’t make sense.

What to look form

Inspections such as building, pest and strata, if applicable, should be undertaken by qualified professionals. A survey is also recommended to make sure the property boundaries are where they should be and that there are no encroachments. Similarly, you should instruct your lawyer to undertake their recommended property searches so there aren’t any surprises such as illegal building works, building defects, unpaid rates, taxes and levies, rights of way and easements, zoning non-compliance, contaminated land, and compulsory acquisition.

Most jurisdictions have at least one standard form contract for the sale of property. But don’t let the word ‘standard’ put you at ease. Standard contracts often have only the minimum terms and conditions that may not even suit your circumstances.

To avoid any of the above pitfalls, it’s invaluable to ask your lawyer to review the contract before you sign and help draft any special conditions you might need. This ensures you’re always on the front foot on the path to seamless property ownership!

Richie Muir

Legal Director

Richie is an experienced and commercially astute lawyer specialising in property law. He leads lawlab’s team of legal advisors and is the go-to problem solver for complex or unusual matters.  Having spent many years living and studying in Europe he now calls Brisbane home. Outside of work he juggles his time helping bring up his 2 young daughters, playing football and developing property.