What two months of due diligence on our Orakei site actually involved

We spent about two months on due diligence for our Orakei site before we committed to buying it. That covered five specialist reports from five different consultants, and all of it happened before we went unconditional. It is longer than most people expect, but on a site with that many questions attached it was the only sensible way to go about it.

The due diligence clause in a standard sale and purchase agreement is measured in working days rather than months. That is the window most buyers are working to, and on a straightforward site you can get what you need inside it: a review of the title, a read of the LIM, a quick desktop review from an architect and planner, a builder walking the site. On a complicated site the same window is not long enough to answer the questions that decide whether the project works.

What makes a site complicated

Sites get complicated for fairly ordinary reasons, and usually more than one at a time - a slope, an overland flow path, a public service running under the building platform, or a title with interests registered against it decades ago. None of these stop a development on their own, but each one changes what can be built, where it can go, and what it costs to get there. Our Orakei site had several of them, which is why the due diligence ran to five reports rather than one.

Why we took on a site like that

If a slope, a flood path and a live wastewater main all add cost and time, why not just buy something flat with nothing registered against it? It is a fair question.

Mostly because everyone else is trying to buy that site as well. A property with no obvious questions is easy for every other buyer to assess, so that is where the competition concentrates, and it shows up in the price. Complicated sites get looked at by fewer people, and the ones who do look have to price risk they cannot measure yet, so a lot of them either move on or discount heavily for it. That usually means the land can be secured on better terms.

The catch is that the discount is there whether the constraints turn out to be solvable or not, and the price itself tells you nothing about which of the two you have. Due diligence is what tells you. Once we knew that the slope needed a particular foundation, that the main could be diverted and that the title interests could come off, the complexity stopped being a risk and turned into a set of costs we could put in a budget. That is where the margin in this sort of development comes from - not because the work is easier, but because you are paid for sorting out something other buyers could not price.

The five reports

Geotechnical looked at slope stability and foundation requirements, and found the slope was manageable as long as the foundations were designed for it. That answer sets the foundation design, the foundation design affects the build cost, and the build cost decides whether the project stacks up at all. It is usually the first thing we want to know.

The civil engineer looked at the overland flow path across the site and confirmed the egress solution required under PC120. Flow paths drive minimum floor levels and how much of the site you can actually build on, so finding out about them late tends to undo whatever yield you had assumed. Wastewater also sat with the civil engineer, because a live 300mm main crosses the site. The report confirmed it could be diverted, and diverted onto the lower-value part of the land rather than through the middle of where we wanted to build. That one finding made the difference between an awkward layout and a workable one.

Traffic confirmed that access for vehicles could be designed to meet Council's requirements. Where the vehicle crossing goes affects the layout, and the layout affects how many houses fit, so a traffic answer ends up touching most of the rest of the project.

Once we had the answers from the geotechnical, civil and traffic work, we briefed our architect on three typologies that worked in our feasibility models, and asked for concepts for each of them. That confirmed that whichever one we go with, the numbers still stack up.

The title and legal review went through the registered interests, and confirmed that each of them was either removable or did not materially affect what we wanted to do. It was the first review to start and the quickest to come back, and it ran alongside the others.

What we got out of it

Every one of those reports came back with a constraint on it, and none of them came back with something that stopped the project. What mattered was not that the answers came back favourable, but that we had them before we went unconditional, settled the consent strategy or built the budget. Everything after that rested on measured information rather than an assumption.

If we had skipped the reports the constraints would still have been there; we just would not have known about them. Finding a problem after you go unconditional on a site is expensive. In our experience projects do not usually come unstuck during construction - they come unstuck because of something that was missed early, and it takes a while for that to surface.

Why two months is not as slow as it sounds

Two months sounds like a lot until you look at what sits inside it. Each report needs a consultant engaged, a site visit, data gathered, analysis done, and a draft issued and reviewed. Several of them also depend on each other - the geotechnical answer changes what the civil engineer models, and the flow path changes where the architect can place buildings.

Having the team in one place helps with that. When a report comes back, our civil engineer, planner and architect are already across the project and can respond the same day, rather than a report being forwarded between firms that have never spoken to each other. It also avoids the situation where one consultant's assumption quietly contradicts another's and nobody notices until much later.

What it costs

Five specialist reports is real money spent before anything has been created on the site. It is also the only money you spend that can still tell you not to go ahead, which makes it reasonably good value.

We would not claim that everything can be seen in advance. Construction is a hard industry and some costs stay hidden until the ground is open. What thorough due diligence does is make the list of surprises shorter. A constraint a consultant can measure is one you can plan around, and finding it before you commit is a much cheaper problem than meeting it at construction stage.

Where we stand

At Creston Property we manage the whole development process - feasibility and due diligence, consenting, construction, and sales management. Keeping due diligence in-house alongside the rest means the people reading a specialist report are the same people who have to live with the answer.

Two months of due diligence on the Orakei site, and no surprises once it went to consent. That is what the time bought.

If you are working through a site and want a development partner who takes this part seriously, get in touch or visit www.crestonproperty.co.nz.