Hi All,
I’m not entirely sure if this is the exact place where I should be posting this, but I do need help in making an informed decision…
I’ve heard in the past that property developers-to-be, who are low on cash and borrowing capacity, can strike up a deal with their builders, while the properties on the land are being built. The deal would be to purchase the land, deal with the holding costs yourself in the meantime (e.g. council rates, interest, etc.), but only pay the builder once the newly built properties actually start selling. This way you have the better option of building, say, four or five properties on a newly sub-divided block of land, as opposed to the one or two you may otherwise be able to afford (and still struggle with other daily expenses), and not worry about the building costs until well after the properties are sold, after which you start paying back the builder. The difference between the builder’s costs and the sale price then becomes your tiny little profit.
Can someone advise if this practice is in force today and whether builders are willing to accept such terms? I know of someone who did something similar, but this was approximately ten years ago when the property market was in a much better shape than what it is now, and developers knew land and properties would be selling well.
Thank you!
If you were the builder, would you accept to build if your client said ‘I will pay you in x months time after I have sold the property & no longer can offer you security over the site’? Or ‘ I’ll pay you the contract sum when I get the money’? no mention of interest or builder’s risk of you defaulting.
Like I mentioned before, I’ve heard of other people doing it, despite the fact it was a while ago. I guess the incentive for the builder will be that they’ll build 4+ properties, for instance, rather than one or two. The details (bankruptcy, interest, etc.) would be mentioned in the contract.
Building 4 props and not 2 means greater risk for builder. Seems builder is carrying all the risk here – at minimum they would want/demand a higher purchase price to mitigate the risk they carry.
Builders want full progress payments made during construction (standard practice) so their materials & wages bills are paid on time.
Well said IP Freely.
And if the market drops… you pay the builder less ?? or not at all ?
Another reason I (as a builder) choose to work for myself, on my own projects.Some builders may enter into a contract with you, with a bank guarantee, but i am guessing this would be hard for you to obtain unless you own the property/s outright.
It's not unheard of for builders to enter into JVs with owners. In this scenario it would be usual for all parties to share risk and reward, and of course to share security. For example, if a property were wholly owned, then a builder could take a first ranking security over the land until such time as the agreed amounts were paid, either by percentage or some other agreement. This is fairly sophisticated and perhaps risky structuring, but it happens.
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