PURCHASER’S DUE DILIGENCE IN BUYING A PROPERTY
Due diligence is defined as actions or steps that are considered reasonable for people to be expected to take in order to avoid harm to themselves or others and their property. In simple words, Due Diligence means doing your homework and acquisitions of required knowledge before entering into any agreement or contract with other person or party to avoid any harms. In buying a property, due diligence is essential to avoid legal complications and ensuring smooth process of purchasing. This article delves into guiding a property purchaser to perform pre-purchase Due Diligence.
- Property Physical Inspection
The most important part of due diligence in purchasing a property is ensuring purchaser is fully aware of the property’s condition before confirming the purchase i.e. before the signing of the booking form / offer to purchase form/ letter of intent to purchase. It is wise for a person to physically inspect a property before deciding to purchase it. Among matters that shall be taken into considerations are the location, the foundation, roofing, plumbing, electrical work, the accessibility from main road.
One of the scopes that is highly overlooked when physically inspecting the property is the neighbourhood assessment. A purchaser would definitely want to avoid incurring legal costs to stop private nuisance committed by the neighbours. This physical property inspection is essential to identify the hidden issues that may lead to costly repairs or health / mental hazards.
- Legal Due Diligence
In purchasing a property, legal due diligence is important to prevent legal complications and ensuring smooth purchase. The most important part of this is to obtain a title search from the land office. In Malaysia, a person need to have a copy of the title to extract the relevant details from there to enable the relevant authority to issue the result of the title search. This process enable a purchaser to verify the authenticity of the title, the amount of Quit Rent payable, ensuring the legal ownership of the property, the status holding of the property (freehold/leasehold), liens, encumbrances, restriction of interest, the category of the land use and special reserve status or zoning status that may jeopardize the transaction. Skipping legal due diligence may cause significant troubles wherein a purchaser may unknowingly violate the zoning restriction or other compliance when purchasing a property.
In the event that the property is free from encumbrances, it is also very important to check the availability of the original title and its pelan tanah. If the property’s owner has lost the original title or pelan tanah or both, then the property owner’s need to obtain replacement of original title from the land office which normally consumes a period of approximately six (6) months.
In the event whereby the property owner’s name endorsed in the title deed as “Executor”, the process of legal documentation of the Sale and Purchase Agreement have to passed through an additional process, wherein the Executor shall apply an order for sale from the High Court of Malaya as a pre-condition to the sale and purchase transaction. Additional process means additional timeframe to complete purchase transaction. This is one of the important things that a purchaser may need to consider before buying a property.
- Financial Due Diligence
Apart from checking self’s financial capability to purchase the property either by cash or by property-financing, a purchaser shall also be aware of the hidden costs that may incurred in purchasing the property. A purchaser shall take note of the fees payable to the solicitors attending to the agreement and legal documentation, the registration fees payable to the land office, the stamp duty payable to the Inland Revenue Board, the maintenance charges payable to the Management Office, the Quit Rent and Assessment payable to the land office and Municipal Council respectively, property taxes that shall be retained from the Purchase Price payable to the Inland Revenue Board and et cetera. In Malaysia, there is special mandate for a first-time property owner to get exemption from stamp duty for the instrument of transfer subject to the terms and conditions imposed by the Inland Revenue Board. Further to that, a purchaser shall also check the outstandings incurred to the Property in respect of the outgoing bills that may cause the Property to be forfeited in the event of failure of settlement. A purchaser may request the seller to provide him with the copy of the bills up to date to verify if there is any outstandings on the bills.
In a nutshell, purchasing a property is regarded as a big purchase which involves numerous authorities, costs and risks. Therefore, due diligence shall be taken by purchaser before confirming to purchase.
