Flick this issue straight to the Dept of Fair Trading.

If you paid via a Credit card (always), lodge a complaint with them that you did not received what you paid for (a 'legiable'  inspection report) and ask for a 100% refund.

Silly question but did you take out insurance on the property the moment you signed the contract. You have an 'insurable interest' and would have got insurance in a heartbeat.

You must get at least a 'cover note' that covers you for the first 2 weeks (to allow you to shop around to get better quotes) at no initial cost. This can be done with a simple phone call to any insurance firm or broker.

If you have got this insurance, claim against them.

As for the Department of Housing, you do need a lawyer. Make sure he claims that the property you are buying is now 'substancially different' from what you have contracted to buy.

It may appear that they have also failed to properly secure the property.

Not sure which state you are in but some states allow for a 'cooling off' period so read your contract and make an IMMEDIATE withdrawal from the contract in writing (Email, fax and letter-cover all bases) if this option is available to you.

If you are forced to complete the contract, you will have been given the right to conduct an 'entry inspection' prior to completing settelement. This allows both parties to inspect the property to ensure that all is still in order. A typicial case would be that the old owners have removed the water heater, taken the pool cleaning system, taken up all the carpets, removed the fitted carpets kicked in all the doors in the house or painted slogans all over the walls (I assume similar to your case). This allows you to holt the transfer until these items are fixed by the owner at their cost.

I also assume that you had a 'subject to finance' clause' in your contract (please tell you did). If you have and you have made every reasonable effort to get finance ('on terms acceptable to yourself, via a named bank'-make sure you have that as a condition) then you can avoid the contract if that named bank states (in writing) that finance is not forthcoming either in its current altered state or at all.

I hope this assists.  

Hand the sub division to a local surveryer…you could expect a cost of between $2-3,000 and takes about a month. 

It is legal to have a boarder/house mate/friend in your house who makes a 'contribution' to household expenses (power, water, gas, interest, renting furniture, wear and tear of equipment etc).  You both decide what is fair.

As for the ATO, cost sharing/recovery should not be defined as income nor should it affect your CGT exemption.

It should not affect your FHOG either as long as YOU occupy the property for at least 6 continuous months, starting within 12 months of settlement/completion.

Do not get confused between what is 'adding value' like an extra room/an outdoor living area as compared to repairs and maintance (new paint/carpets etc).

If you spend $10K on new paint and carpets, you may get an increased valuation of between $10-15K and make it easier to sell (reducing your holding costs and allowing you to move quickly onto the new profit making deal. However, if you spend $15K by doing the paint and carpets AND dividing a LARGE room into an extra bedroom/office, you could add $30-45K to the deal.

Living space is what adds value.

Speakto a finance broker who specialises in 'commercial' property development. There are waysto get around the lack of future income (other than the property income itself).Depending on the equity held in property, she should qualify for a development loan as they banks will do a valuation on the end value.

Another way to deal with it is to go into partnership with a reputable builder where she provides the land and they provide the materials and labour and finance.
She talks a % of the profit by way of retaining several of the finished developments (as will the builder, who may or may not sell them to get to his profit).
This is a good method as it take sthe stress out of getting a LARGE loan with the builder completing ALL the paperwork AND you get to retain ownership of the land until the final sale to an end buyer.
You will provide him with several options (one covering each unit to be passed on) to buy (at a pre determined price) and a licence to enter the property for the purpose of completing the building development. As you are not (yet) selling the units, the builder will not be required to pay stamp duty. Stamp duty is paid by the final buyer who takes the option to purchase from th builder. This prevents double payment of stamp duty and retains the builders cashflow.

You will need sound legal and financial advice to use this method buy well worth it in the end.

Agreed.

Remember, there appears to be no evidence that the property was not and is not still "…occupied by an applicant for a continuous period of at least six months…" being based on an inaccurate/false assumption (being the level of power/water/gas bills) that everybody must spend the same amount for every house no matter how many people live there or their personal life style or working situations.

You have it in a nut-shell…a "revenue offence". No such 'alledged' offence has been or could have been reasonable arrived at.
Just being a state revenue service does NOT negate the requirements of that office to first seek the infomation from the 'alledged offender' or to advise him that the infomation is to be obtained from a 3rd party. The Vic SRO MUST first seek the info from the individual.
It appears that the Vic SRO obtains private info as a matter of course without first contacting the person concerned, a clear breach of the Act.

Only AFTER the Vic SRO has the details in front of them could they every come to a conclusion that an 'offence' has/could have/might have been committed. They are not entitled to go on a fishing trip.

Assuming the Act was not breached (which I contend has been breached), there is no evidence that the property was not
and is not still "…occupied by an applicant for a continuous period of at least six months…" being based on an inaccurate assumption (being the level of power/water/gas bills) that everybody must spend the same amount for every house no matter how many people live there or their personal life style or working situations.

Stick to your guns ,then when the dust settles, look at lodging a formal complaint for breachs of the Act.

This is not the ATO nor the AFP, its the Vic SRO and in every case they need a prima faca case of wrong doing before they can get access to private data. Are you saying that you accessed personal data without a warrant such as phone records, power/water/gas bills? And data sharing/matching only relates to sharing of data between govt departments and not private companies.
Even the AFP is restricted in what they can and cannot access. I refer you to Section 7 of the Telecommunications (Interception and Access) Act 1979 (Cth) (TIA Act). The TIA Act generally prohibits interception of telecommunications. The main exception to this prohibition is interception under a warrant. Under sections 46, 46A and 48 of the TIA Act a telecommunication interception warrant, a named person warrant and a warrant for entry on premises can only be granted for investigations of serious offences as defined in section 5D.
The Vic Information Privacy Act 2000 – SECT 9 shows that privacy must not be violated by a Govt department or its agents (including outsourceing [private investigators]).
http://www.austlii.edu.au/au/legis/vic/consol_act/ipa2000231/index.html

Application of Act  9. Application of Act  (1) This Act applies to-     (a)  a Minister;     (b)  a Parliamentary Secretary, including the Parliamentary Secretary of         the Cabinet;     (c)  a public sector agency;     (d)  a Council;     (e)  a body established or appointed for a public purpose by or under an         Act;     (f)  a body established or appointed for a public purpose by the Governor          in Council, or by a Minister, otherwise than under an Act;     (g)  a person holding an office or position established by or under an Act         (other than the office of member of the Parliament of Victoria) or to         which he or she was appointed by the Governor in Council, or by a         Minister, otherwise than under an Act;     (h)  a court or tribunal;          (i)    the police force of Victoria;     (j)  a contracted service provider, but only in relation to its provision         of services under a State contract which contains a provision of a         kind referred to in section 17(2);  
There are exceptions of course: ie. Law enforcement by a law enforcement 'agency' [as defined under he Act].
Information Privacy Act 2000 - SECT 13 

Law enforcement  13. Law enforcement  It is not necessary for a law enforcement agency to comply with IPP 1.3 to 1.5, 2.1, 6.1 to 6.8, 7.1 to 7.4, 9.1 or 10.1 if it believes on reasonable grounds that the non-compliance is necessary-     (a)  for the purposes of one or more of its, or any other law enforcement         agency's, law enforcement functions or activities; or     (b)  for the enforcement of laws relating to the confiscation of the         proceeds of crime; or     (c)  in connection with the conduct of proceedings commenced, or about to         be commenced, in any court or tribunal; or     (d)  in the case of the police force of Victoria, for the purposes of its         community policing functions. 
IPP means Information Privacy Principle;  law enforcement agency means-     (a)  the police force of Victoria or of any other State or of the Northern         Territory; or     (b)  the Australian Federal Police; or     (c)  the Australian Crime Commission; or     (d)  the Commissioner appointed under section 8A of the         Corrections Act 1986; or     (e)  the Business Licensing Authority established under Part 2 of the         Business Licensing Authority Act 1998; or     (f)  a commission established by a law of Victoria or the Commonwealth or         of any other State or a Territory with the function of investigating         matters relating to criminal activity generally or of a specified         class or classes; or     (fa) the Chief Examiner and Examiners appointed under Part 3 of the         Major Crime (Investigative Powers) Act 2004;     (fb) the Special Investigations Monitor appointed under Part 2 of the         Major Crime (Special Investigations Monitor) Act 2004;     (g)  an agency responsible for the performance of functions or activities         directed to-     	(i)  the prevention, detection, investigation, prosecution or punishment of         criminal offences or breaches of a law imposing a penalty or sanction         for a breach; or     	(ii) the management of property seized or restrained under laws relating to         the confiscation of the proceeds of crime or the enforcement of such         laws, or of orders made under such laws; or     (h)  an agency responsible for the execution or implementation of an order         or decision made by a court or tribunal, including an agency that-     	(i)  executes warrants; or     	(ii) provides correctional services, including a contractor within the         meaning of the Corrections Act 1986, or a sub-contractor of that         contractor, but only in relation to a function or duty or the exercise         of a power conferred on it by or under that Act; or     	(iii) makes decisions relating to the release of persons from custody; or     	(i)  an agency responsible for the protection of the public revenue under a         law administered by it; 
You will note that the party must believe "on reasonable grounds" (s13) that non complienance is necessary. 
This is the main point; it is NOT reasonable for a party to assume wrong doing based on the low level of spending of a power/water
or gas bill, without taking into account the circumstances of the person concerned. An assumption has been that every person 
MUST fit into a 'normal' level of spending.
To access private data without 'reasonable grounds' is a breach of the Vic Infomation Act 2000.

As to the method of collecting private data, the Information Privacy Act 2000 - SCHEDULE 1 requires that private data be collected
from the individual concerned [s1.4]. Only then can it seek info from another person, after first informing the individual the 'must take reasonable steps to ensure that the individual is or has been made aware of the matters...' [s1.5].

1. Principle 1-Collection  1.1. An organisation must not collect personal information unless the information is necessary for one or more of its functions or activities.  1.2. An organisation must collect personal information only by lawful and fair means and not in an unreasonably intrusive way.  1.3. At or before the time (or, if that is not practicable, as soon as practicable after) an organisation collects personal information about an individual from the individual, the organisation must take reasonable steps to ensure that the individual is aware of-     (a)  the identity of the organisation and how to contact it; and     (b)  the fact that he or she is able to gain access to the information; and     (c)  the purposes for which the information is collected; and     (d)  to whom (or the types of individuals or organisations to which) the         organisation usually discloses information of that kind; and     (e)  any law that requires the particular information to be collected; and     (f)  the main consequences (if any) for the individual if all or part of         the information is not provided.  1.4. If it is reasonable and practicable to do so, an organisation must collect personal information about an individual only from that individual.  1.5. If an organisation collects personal information about an individual from someone else, it must take reasonable steps to ensure that the individual is or has been made aware of the matters...

On the facts presented, it does not appear that the individual has been given the opportunity to provide the infomation required before
the Govt department obtained private infomation from a private power/water/gas company (without or without a warrant).
Neither have they taken 'reasonable steps to ensure the individual was made aware of the matters'.

Putting the failure of the Vic SRO to abide by the Infomation Act 2000 to one side for the moment, the clerk conducting this
matter has failed to look at the personal circumstances of the before seeking infomation of an alledged offence.

Even assuming the Act was no breached (which I contend has been breached), there is no evidence that the property was not
and is not still "...occupied by an applicant for a continuous period of at least six months..."


Stick to your guns then when the dust settles, look at lodging a formal complaint for breachs of the Act.

his 
 

I hope its not too late for us all
Look at rent to buy options as a way to get back into the game; this requires limited cash as youtake over someone elses mortgage then manage the final sale to a buyer afte rthen have added additional equity via completing a reno at their cost.
As long as you have at leat $20K (as an absolute min) so you can pay expenses and meet the initial mortgage payments and pick the right houses you should be OK and have no need to qualify for a bank loan ever again.
I STRONGLY advise you to work with somone on your first few deals who has a solid reputation in this area; get your knowledge and dip your toe in the water gradually.
Ask for contacts via this blog.

Best of luck.