Property Investors Beware: Understanding Structural Defects


Get the money

You may have heard about the recent report coming out of Australia regarding the Opal Tower.

For those unaware, the building, less than six months old, had to be evacuated in December 2018 due to major cracking in the building. Although structurally sound, the building itself will need extensive work over the coming months to repair the damage.

So why should property investors be cautious? The answer being – the value of the units has fallen. Those with Opal Tower units have been receiving offers significantly lower than the original purchase price. Although this appears reactionary, the long-term effect of value decline in property is very real.

The effect on value

Once a building has a major structural defect, it can get logged (the Opal Tower will be recorded on the strata register). This means that those buying the property will be made aware of the structural defects. More commonly in the UK, a buyer will often instruct a chartered surveyor that would discover these defects.

Essentially, the buyer is being made aware that they are purchasing into a problem property. It could be an indication of bad workmanship and may mean that additional costs will be involved in the purchase of the property to amend any of the said structural issues.

With the potential for further disruption in the future, combined with lower buyer confidence, the value of the property naturally falls.

The uncertainty around the investment therefore effects demand, particularly in the short term. Until the structural defects have been remedied, you will find limited demand for the property. Potential buyers won’t know what they themselves will be liable for and will most likely be risk adverse.

No option but to hold

Unless owners are willing to take a sizeable hit on the property, there will be little option but to hold the property. This is not only damaging to the property owner, but also impacts the economy as a whole, with less transactions being made.

How to protect yourself when purchasing property

It is therefore essential that as a buyer you do not end up in this situation, and ensure that the property is a good investment. Oftentimes, structural defects will not be disclosed by the seller or agent.

Therefore, the first thing you should do as a potential purchaser is to ensure that a clause is entered into the property contract. The clause will cover you as a buyer and will allow the option to discontinue the purchase after the discovery of structural defects. Be careful here, the definition “structural defect” is open to interpretation, so make sure this is clearly defined in the contract. To support this, ensure that you are instructing a reputable chartered surveyor to properly assess the building before purchasing. With an expert report, combined with the cover from the contract, you will be protected as a buyer.

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