When Your Project Budget Is Too High
On today’s show we’re talking about what to do when the numbers don’t work.
You look at a property, you think there’s a deal. But then you run the numbers and pretty quickly conclude that the margin is too thin to take the risk.
At the same time, you see multiple examples of larger projects in the same area. If your costs are similar, then those other projects should not be getting built. They too would be suffering the same risks, costs, and market conditions. So what do you do when it seems that the projects in the same area are getting done, and your virtually identical project doesn’t make sense on paper?
Profits on a project are the result of pretty simple math. So why are your projects not passing the math test? What do these other developers know that you don’t? What are they doing differently?
Profit is simply sale price minus expenses. Your expenses are pretty simple too. They’re the cost of land, labour, materials, design, management, and the financing cost for the property and the inventory of materials.
Are the other guys cutting corners? Are they negotiating deeper discounts? Are they getting access to lower cost financing? Are bringing more equity and borrowing less money? Are they negotiating better hourly rates for the labour component? The answer is yes to most of these, except for one.
The bigger developers don’t cut corners. They negotiate. They make sure that their numbers work without cutting any corners.
One of the biggest differences I’ve noticed is that major developers tend to land bank. We’ve done this in a few markets with excellent results. When you buy land at today’s price, the land often appears too expensive to justify developing it. In some cases, the developer buys the land and just sits on it for a number of years. They also buy the land with equity and not debt. That way their holding cost is kept to a minimum.
Fast forward another five or ten years and that land all of sudden looks like it was bought really cheap.
The most established developers get access to the lowest cost money. They have a strong enough track record that they can get funds that are guaranteed by a mortgage insurer.
I’ve seen major builders negotiate amazing pricing compared with the retail price for materials. You can count on discounts of 30-50% compared with the retail price for materials at the big box home improvement stores.
When it comes to materials, the pricing of materials varies widely with volume. If you buy a truckload directly from the manufacturer, you can save about 15% compared with buying from a distributor. If you’re buying in volume from a distributor, you can expect a huge price break from them too if you order enough material.
Job costing is an art form, and the larger builders have professional estimators whose job it is to source the right quantity of materials, scheduling delivery, and getting the lowest price. If you pay an estimator, say, $80,000 a year. Then you need to know that you’re going to get way more than $80,000 in savings in order to justify hiring that position. In order to get more than that amount in savings, you need a volume of business.
They buy quartz counter tops by the container load from the factory. They’re paying $35 per square foot for quartz instead of $75 - $100 per square foot at the big box home improvement store.
All these little discounts add up over the course of a project.
The big contractors are also the fastest. They show up at the job site with all the materials and tools to get their work done effectively. They expect the delivery truck to be late. So they bring the needed materials for the first few hours of work each day.
It could be that your project is too small. It could be that your contractor is too small as well.