What to look out for when buying a higher risk property?

Most people borrow money from banks or lenders to purchase properties or lands, commonly known as mortgage, and it's because mortgage is a secured loan, the borrower promises collateral to the lender in the event that they stop making payments. In the case of a mortgage, the collateral is the property. If you stop making payments on your mortgage, your lender can take possession of your property and sell it, in a process known as mortgagee sale.

This means banks and lenders have every right to ensure the collateral (security) provided for mortgage is suitable and acceptable. Generally banks and lenders avoid to accept leaky or unconsented properties as security and collateral as they increase the risk to the lender. If the property is damaged or at high risk, then it may be difficult to re-sell to recover the debts in the event of mortgagee sale.

Here are 2 examples of higher risk properties, and you are expected to do more due diligence to satisfy the lenders' concern.

Monolithic cladding properties

Many of this type of cladding was direct fixed to the wooden framing, with no cavity system. This made it easy for water to trap between the cladding and framing. They can come in few different materials such as plaster, stucco or fibre cement which are applied over a backing material such as plywood, polystyrene, cement or building paper. In between mid 1990s to early 2000s, many of these properties were built with untreated framing which can be rotted easily if exposed to water. You often see some of this style of properties have flat roofs, no eaves, which also increase the risk of water passing through. You will need to get a building inspection report done and banks will only accept reports from certified watertightness inspectors, so check in with your advisers before engaging one. If it is confirmed leaky, it is very likely it's a no from banks, however you may be able to borrow from non bank lenders and you will need to have sufficient funds to complete the repairs and remediate the issues, then refinance back to mainstream banks with full signed off from the council.

Unconsented work on properties

Anything from bedrooms conversions, wall changes, carport added, shower and toilet added, and recently I saw a tiny home with electricity and plumbing system added located in the backyard on a cross lease land selling as chattel of the main house. Vendors are obligated to disclosure all unconsented work in the properties, and if agents are involved they need to have the permission of the vendor to disclose these issues to buyers. Sometimes these properties are harder to sell due to the complexity of obtaining mortgage and insurance, and vendors may sell at discounted price, other times buyers actually love these works and want to keep them. Insurance and lending are big issues when coming to unconsented work. You need to ensure these works are up to the current code and get signed off as safe and sanitary, maybe getting a certificate of acceptance from council. You also need to ensure insurance providers accepting the risks and works with no exclusion, which is required by most lenders. Buyers should get LIM report on a property they are interested in, get a property inspection report from a qualified building inspector, and look at the property's files and the original building plans etc. Working closely with your lawyers and advisers and ensuring all parties (banks, insurers, lawyers) are all on the same page.

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