Opinion: Buyers Should Be Wary of Paid “Due Diligence” Reports That May Hide Conflicts of Interest

Opinion: Buyers Should Be Wary of Paid “Due Diligence” Reports That May Hide Conflicts of Interest

As Bali and Lombok continue attracting record levels of foreign property investment, consumers are increasingly paying consultants hundreds of dollars for so-called independent due diligence reports before committing to a purchase.

While obtaining professional due diligence is generally a wise step, buyers should also conduct due diligence on the people providing the due diligence.

A recent example involving a proposed property purchase in South Lombok highlights why.

According to information recently provided to this publication, a prospective buyer paid more than AUD $600 for a report assessing a high-profile development in South Lombok. The report allegedly contained misleading and deceptive conclusions that sought to discourage the purchaser from proceeding with the investment.

It was later discovered that the individual who prepared the report was allegedly connected with marketing a competing property development owned by members of their own family.

If accurate, this raises serious questions about conflicts of interest.

Rather than providing an impartial assessment of the project requested by the client, the report allegedly appeared designed to steer the buyer away from their chosen investment and towards an alternative development in which the report’s author had a commercial interest.

A Growing Concern

Industry participants say this practice is not uncommon.

Many so-called property advisors, consultants and due diligence providers earn commissions from selected developments or have commercial relationships with particular developers.

That does not automatically invalidate their advice. However, problems arise when those commercial interests are not clearly disclosed to clients.

Consumers paying substantial fees often believe they are receiving an independent professional opinion when, in reality, they may instead be reading what amounts to a sales document for competing projects.

Follow the Incentives

Before paying for any due diligence report, purchasers should ask several important questions:

• Does the consultant receive commissions from developers?

• Do they own or promote competing projects?

• Have they disclosed all commercial relationships?

• Is the report based on independently verifiable facts?

• Are the conclusions supported by objective evidence?

• Has the consultant recommended the same alternative developments to numerous clients?

If the answer to any of these questions raises concerns, buyers should seek a second independent opinion.

Beware the Bait-and-Switch

One of the oldest sales techniques is the “bait and switch.”

In the property industry, this can allegedly occur when a buyer expresses interest in Project A but is provided with an overwhelmingly negative report, only to be encouraged to purchase Project B instead, particularly where the advisor has a financial interest in Project B.

This is very different from legitimate due diligence that identifies genuine legal, financial or planning risks supported by evidence.

An independent report should analyse facts, not manufacture reasons to redirect a purchaser toward another investment.

Verify Everything

Property purchases often involve hundreds of thousands of dollars.

Consumers should therefore independently verify major claims contained in any report by checking planning approvals, land titles, permits, developer documentation, legal advice and official government records wherever possible.

No single paid report should ever be relied upon as the sole basis for making such an important financial decision.

Transparency Builds Trust

The Bali and Lombok property markets continue to mature and attract international buyers.

Independent due diligence remains an essential part of any purchase process.

However, genuine independence requires transparency, objectivity and full disclosure of any conflicts of interest.

Consumers deserve reports prepared in their best interests, not reports that may simply be another form of marketing disguised as professional advice.

As always, buyers should remember a simple principle: before trusting the advice, understand who is giving it, who pays them, and who stands to benefit from the recommendation.