Good morning, guys.
News overnight has hit. Another QLD builder gone broke.
I cover it all (and what this means to YOU) in this video.
As usual there’s a text version below too.
Another QLD builder gone broke.
They’ve got 1000 homes.
So let’s do some math. If you’re behind the eight ball by $30,000 a house, which a lot of builders are right now, multiply by a thousand homes…
That sums up to $30 million bucks in the red.
Plus sales commissioned people.
But I’m not writing to you today to talk about how hard it is to be a builder right now. Here’s what I DO want to talk about:
If you’re doings a spec home… a house and land package… or something similar… how can you protect yourself?
To see how you can protect yourself, you need to understand the current circumstances causing this problem.
Because challenges are only going to increase over the next few months.
You know, in the mid-2000s, I experienced a builder going bust. And that was, in some ways, one of the best things I learned leading up to the GFC.
And the GFC was a very tough time for me. I experienced a fair bit of pain and breakdown emotionally but also in terms of finances.
I learned how things work and why some things don’t work anymore and what to steer clear of.
That’s the real key!
If you can figure what doesn’t work anymore, and you avoid those things, it can definitely lead you to a more happy and more healthy life.
Back to 2005, 2006, 2007. I was involved with a builder doing JVs. He essentially became very, very geared up. He was a super salesperson, but wasn’t great in back-office. His wife at the time looked after the back, and she was great with paperwork. Not so great with finances thought, from my experience anyway.
That’s a big part of the challenge as a builder. You often underprice to win business. And even if you don’t underprice, your pricing is six-to-twelve months out from when you’re actually starting the project and getting paid.
So even if they do price legitimately with a good margin in it, it’s very hard to control the supplier.
If the supplier cannot get the goods, the builder is in a big problem.
If the cost of goods hikes, the builder is in a big problem.
Again, $30,000 overshot on one build can be managed. On a thousand builds… that’s a $30 million dollars deep hole.
And even just the delays. If you’re a builder and you have a hundred clients who are behind on their payments $15,000 to $20,000 each. That’s at least $200k, $300k behind the eight ball every month.
In theory, a building business is a cash flow business, right? You put down the slab, you get paid. You make a profit. Rinse and repeat. But one of the biggest issues that builders have is having big overheads. They’ve got staff, they got project managers. They’ve got an office costing thousands of dollars a month in rent.
If you look at another type of business, let’s say petrol stations.
If you run a petrol station, people who buy the petrol pay you the same day. And generally, the money will clear within 24 hours.
Same like a supermarket. Generally, the stock that you sell, you generally get paid the same day.
Not so with construction.
And we haven’t even talked about the weather yet!
OK, enough background. Back to the key question!
What can YOU do about this to protect YOURSELF?
Learn from what’s taking these builders down, and fix your own business in advance.
For example, I switched my staff to mostly work from home post-GFC. More efficient and less overhead. By the time COVID came, my business was already set up for remote work.
I didn’t say be a scrooge, mind you. But absolutely become more cost-conscious. Look at ways to maintain the viability of your business.
Being a property developer or investor, you can actually get rid of most of the overhead.
You don’t need staff.
You need an engineer? You just contract an engineer. You need a town planner? you do the same. You need a surveyor? do the same.
You don’t need to have all these people in house!
One of my mentors often talked about how “your office is your armpit.”
What did he mean? He meant that having a manila folder and putting it on your armpit is all the office you’ll ever need. Everything else can be on your laptop and that’s it. Huge savings there.
A wise man.
The name of the game for the next 12-24 months?
Managing your cash flow. This is your No. 1 most important objective.
Trust me on this.
Look at your overheads and start figuring out where you can actually get a little bit leaner.
DO IT NOW!
Don’t wait until you’re forced to.
And then on my next video, I’ll show you how you can protect yourself from a builder that’s potentially going broke.