The term due diligence is a concept with which property investors should be well familiar.

Once a property deal is in the offing, it becomes essential to uncover all fishhooks before purchasing.

A starting point is the Land Information Memorandum (LIM) issued by the local authority, but this document won’t necessarily disclose everything the intending investor needs to know.

Because their industry is becoming more regulated, real estate agents are more proactive in looking to understand any known or potential issues with listings and should disclose problems with properties to avoid any possibility of formal complaints to their regulating body.

Nonetheless, the prudent investor would not leave it to chance that a real estate agent is going to know and disclose all potential risks concerning a property.

Meth Risk

An increasing problem is methamphetamine contamination especially if a property has been used as a lab. ‘Meth’ or ‘P’ contamination could mean that a house is uninhabitable and therefore cannot be safely rented out to tenants, with potentially large bills looming for decontamination cleaning, interior refit, or even demolition in escalating order of seriousness.

The history of a house as methamphetamine contaminated could become permanently recorded on a LIM, which could affect the value of the property and future resale prospects.

Insurance companies may not pay out the full cost of remedial actions required to fix or destroy a contaminated property or potential loss of rent if contamination occurred before the policy start date.

If the property is mortgaged, a bank will still require the mortgage to be serviced even if the investor is saddled with remediating an untenantable property.

To avoid this risk, part of the initial due diligence can include meth testing before buying any property, bearing in mind that traces can be invisible to the naked eye, and that meth users and manufacturers can superficially clean or paint over contaminated surfaces.

‘P’ Clause

In the sale and purchase agreement, a strong due diligence clause should be inserted to allow further investigation where necessary, which if anything adverse is found will allow you to either withdraw from purchase or ensure the vendor remedies before settlement.It is also important to engage with your bank regarding any issues to ensure awareness of impacts that could arise to talk through available options.

Regular testing for meth contamination before and after tenants move in can be helpful in proving who is responsible. Evidence will be required if your intention is to recover costs of any remediation through the Tenancy Tribunal.

Bach Contamination

Holiday homes for rent are especially at risk. Investors and family bach owners need to be particularly careful about collecting sufficient identification on any persons seeking to rent their property for a short-term stay. Someone responsible should always meet renters to identify them, hand them the key and show them the property.

If there is any suspicion of meth manufacture, the holiday home should be tested with a view to the civil and criminal liabilities of the renters, not to mention the health and safety of other occupants.

Vigilance of this kind can help keep the scourge of ‘P’ users and makers out of rental properties. Investors can feel under pressure to make an offer to purchase property as attractive to a vendor as possible. Often this means removing as many conditions as possible, especially in a seller’s market. As the saying goes, however, “buy at haste and repent at leisure”.

Ask Sandy: Email your questions about property investing to Sandy_Richardson@bnz.co.nz Sandy Richardson is a national manager for Premium at Bank of New Zealand and heads a team of property managers who specialise in residential Property Investment. Visit bnz.co.nz/rentalproperty or phone 0800269 009 to find out more. This article is intended as a general discussion only and is based on selective information which may not be suitable for your purposes. BNZ strongly recommends the recipients take independent legal and taxation advice prior to making any investment decision. The views expressed are the writers own and do not necessarily represent those of BNZ or its related entities