There are a number of temptations that see small Property Developers making unwise decisions which often creates a snowball effect of poor decision making. Small Property developers should carefully consider the 4 temptations including accepting the local agents’ appraisal, time and costs involved in setting up separate entities, betting the house and not allowing enough consideration for project shortfalls.
1. Accepting your Local Agents’ Appraisal as Gospel
We often see developers developing their Project Feasibility based on 1 or 2 appraisals for the end values from local agents. These values might be correct, but often, the bank’s panel Valuer will severely discount those end values. Beware and always adopt a more conservative end value, to avoid any nasty surprises down the track.
2. Avoiding the Time and Cost Involved in Setting up Separate Entities for each Project
Most developers execute each project through a Special Purpose Vehicle that is specifically incorporated for a single development project. By not creating separate entities, you leave yourself open to the possibility that a delay or problem in one project can prevent sales from another good project from settling in a timely manner.
3. Bet the House
Many small developers simply do not have enough equity to develop a particular project. An easy solution upfront might be to cross-collateralise other properties to increase the amount of equity available to the lender. However, this can cause a tremendous amount of heartache for yourself, when you begin to struggle with partial releases and higher than expected release figures.
We highly recommend a separate loan against the collateral security and for the cash proceeds from this separate loan to be used as the additional equity. By doing it this way, the cash contribution will allow you to finance your project as a stand-alone transaction.
4. Not Allowing Enough
To artificially make the project feasibility look better, we sometimes see developers not allow enough for; Contingency, Sell Down Period, Marketing etc. Murphy’s Law tells us that if something can go wrong, then it certainly will go wrong. There is nothing worse than a project being 98% complete and there are shortfalls that cannot be covered and are preventing practical completion and the subsequent settlements. This leads to desperation and desperate people do not make good decisions.
Discuss with BEDROCK Funding, how we can help in guiding you through the process correctly and avoid costly mistakes for your current or next development project.
At BEDROCK Funding we work in the Construction Finance Industry EVERY DAY and we welcome the opportunity to assess your next project and provide you with a no obligation complete Funding Overview. Contact us at 1800 BEDROCK or visit our website at www.bedrockfunding.com.au