The 4 Principles of Securing Real Estate Development Finance

Unless you’re one of a very privileged group of people and you do not need to seek Real Estate development finance, getting the cash you need is probably one of the most influential aspects of whether your real estate venture will succeed. That said, even if you don’t need to borrow money for a development, it usually makes business sense to borrow at least some of the cost anyway (that point is for a different article!).

Make no mistake, like all investment – real estate involves an element of risk to a lesser or greater degree. And like all businesses, risk should be managed. However, it could be said that ‘risk’ allows profit (or loss) to be made. If a real estate Investor or Developer has no appetite for risk, they may as well stuff their mattress with cash rather than putting it into Property. If there were no risk involved, wouldn’t everyone be a Property Speculator?

So it could be said that Risk is nothing to be intimidated by, but that it should be monitored so you don’t lose the shirt off your back (and with property, it’s possible to lose an awful lot of money in a short space of time if ridiculous mistakes are made). A philosophical attitude to this is quite important, because the truth of the current situation is that banks would really prefer the customer to shoulder as much of the business and project risk as possible. Let’s face it banks are in a powerful position, they have the money that the Developer wants…they call the shots. If you haven’t got the nerve to take on the risk, the bank will lend the money to another Developer who is prepared to take the risk.

I personally don’t think that this is a bad situation. It could be argued that the current/recent financial crisis who due in part, to excessive lending to people who should have been subject to greater scrutiny.

The 4 (very) basic rules to consider before approaching banks for Real Estate Development funding are:

1. Make sure you have access to people with experience! It is often said “never invest in anything you don’t truly understand”, if you are a novice Developer you should not be attempting to learn everything my your mistakes….they will be too costly. Speak to people with experience. The bank will insist upon you having good and regular access to appropriate professionals such as Architects, Structural Engineers, Realtors/Estate Agents or Building Surveyors.

2. Don’t expect to borrow too much against the project! As a general rule, a bank will expect you to put up at least 25% of the combined total of initial project purchase and build/development costs. You should also include a contingency fund of around 5-10% of the total build cost figure. It’s also a good idea to have enough working capital to be able to fund the initial stages of the individual build stages just until the bank releases funds in a staged-payment arrangement.

3. Don’t use a Limited Liability Company when you are starting out! The primary purpose of a LLC is to limit the personal risk of the company owner(s), this is not what the banks want to see. They will want to ‘facility’ to pursue you to recoup losses if it all goes wrong. This may sound dramatic, however I am talking worst-case-scenario! In reality, banks would far rather work with you to sort out problems than immediately enforcing their agreement covenants.

4. The CV of the individual Developer. When you begin to establish a good track-record in property development, the banks will tend to be far less nervous about lending you money. It’s never a good idea to take on a huge project that the banks knows will challenge you. It’s far better to gain experience by carrying out light work (such as modernisation and redecoration) rather looking for a substantial rebuilding project as one of your first attempts. ‘Easing yourself’ into the field of Property Development is the way all very successful professional developers have done it. It’s not a way of life that should be entered into on a whim; if a Developer gets in ‘above their head’, they are far less likely to continue in the field. Completing a Real Estate development is a very satisfying thing, it’s much more sensible to complete several ‘quick refurbishments’ than jumping straight into a substantial project requiring specialist structural work.

To conclude, banks are willing to lend at the moment. they have simply become more scrupulous with who they lend to. If you have prepared yourself properly to begin your venture (and you’re creditworthy), then you will find that the banks are far more likely to accommodate your requirements for Property Development Finance.

Real Estate Development – Ways to Avoid Costly Mistakes During Property Development Construction!

Once the building contractor is on site and the project is underway – it really is an amazing feeling when you start to see your real estate development project start coming up out of the ground.

Where a developer is planning to sell some or all of the units, marketing activity starts the moment finance is secured. The construction phase is usually the most expensive, therefore we carefully manage the project during this stage.

We schedule regular site meetings with our Building Contractor, typically every week or two, to discuss any queries or potential problems and we make sure our Building Contractor has fulfilled their Occupational Health and Safety (OHS) obligations fully.

Remember that it’s the Building Contractor (not the Owner or the Architect) who represent themselves as the expert on erecting buildings. Therefore it’s never a good idea to tell the Building Contractor how to build the building instead we instruct the builder as to the desired result to be achieved, not how to achieve it.

We pay our Building Contractor progressively, either monthly or at the completion of each scheduled construction stage, using draw-downs from the construction loan.

It is not unusual for the Building Contractor’s claim for completed works to vary from their schedule so it is important to make payments only to the value of the completed work.

Some real estate developers appoint an independent building inspector to review the quality and amount of work at each progress payment stage as this sends a message to the Building Contractor to be on the ball. This could be your Architect or you can find a good Building Inspector from the Master Builders Association in your area.

We try not to make changes after construction has started, as they usually end up being costly, and delay the completion date. If changes are necessary to the original contract scope of works or finishes, we request the Building Contractor advise us in writing what the variation to the original contract sum and the delay time will be so we can approve it BEFORE he makes any changes.

Before the handover at final completion, we have a joint inspection of the project with our Building Contractor (we also recommend with the architect and/or building inspector present). A list is made of all the defects and problems that need to be fixed by the builder before the building is officially handed over.

Simply, the developer’s aim under the contract with the building contractor, is to produce the designed building on time, within budget and at the quality standard that has been specified.

Therefore, during the construction stage, it is essential that a savvy developer (or their appointed project manager) monitor the progress and cost of the construction work to ensure that the project is delivered on-schedule and on-budget.

Any time extension from the plan/schedule or variation in cost will potentially affect the profitability of the property development project.

The building contract generally will detail the developers/owners responsibilities. Depending on the contract chosen, these responsibilities will typically include:

* to ensure adequate access to the building site

* to pay progress payments promptly

* to insure the completed project, after practical completion

DELAYS AND EXTENSIONS OF TIME

These are many reasons why delays occur during the construction stage, causing the late completion of the project. Many of these reasons are outside of the contractors control and some of the most common of these include:

* bad weather

* a delay in receiving necessary information from the developer or the consultants

* technical problems

* industrial disputes

Most standard building contracts will allow the builder to clain an “Extension of Time”, for delays caused by factors outside of their control. The practical effect of these extensions is to adjust the Completion Date that was agreed in the contract.

However, where the building contractor is responsible for the delays, either through a lack of programming or for any other reason, the building contract will frequently include for the payment of Liquidated Damages to the developer.

In these circumstances, where the project is delayed beyond the Completion Date noted in the contract, allowing for any extensions of time, the final payments to the contractor will be adjusted for liquidated damages, in the amounts stated in the contract, for each day the completion is delayed.

RISKS DURING CONSTRUCTION FOR A DEVELOPER

As the construction phase is usually the most expensive stage of the entire property development process, and the period that a developer will typically have the greatest negative cash-flow, we continue to carefully manage the project during this stage.

The construction stage can have the greatest potential effect on the final construction cost and the timing of the project. As even short delays or relatively small changes in the cost of the construction can have a detrimental effect on the profitability of the project we recognise this stage as a time of potentially significant risk to the development project.

The risks, during the construction stage, that we are particularly conscious of include:

* the contractor is unable to complete the project

* the completion of the construction is delayed

* the costs of the construction increases significantly

* unacceptable standard of building work

How to Be a Real Estate Developer – Investing in Real Estate

Want to know how to be a real estate developer? Take all the required courses in real estate and get your license to work in this field, and there you go. But what if you want to be more than just a developer? What if you want to learn how to be a very, very successful real estate developer? Well, it seems that that can only come with time, trial and error learning, and years of experience in the industry. But does it really have to be this way? Is there no other way to short-cut through all those years of experience?

There is one obvious way, and that is to learn how to be successful as a real estate developer through finding a mentor, or personal trainer in this same field of expertise. The only problem is that whenever we approach a veteran of the real estate world, we don’t get much in the line of answers. Those who have traveled the long and windy road to success, gaining inside knowledge and the wisdom that comes with experience aren’t all ready to spill their guts about their secrets to those who would simply become their toughest competition.

But here really are those out there who do wish to teach the inside know-how on how to be a successful, well learned real estate developer, and they do so without fear of competition. How do they do this, and where do we find them? The answer to both is through the internet. This kind of distance learning is a perfect way to learn from those who have acquired this wisdom, and for those learned ones to speak freely in educating us in these matters. Finding a personal trainer in this field is worth a gold mine, and with what you learn, you will find many other gold mines to be had in your real estate career.