Critical market warning for developers and subdividers!

About six to eight months ago, I published a video about why I hate construction… And a lot of people got pretty mad!

So it’s time to get a couple things straight:

Look, we obviously all live in houses. Or townhouses. Or apartments. etc. I’m sitting in the dining room of my house here as I’m writing this.

See, this place I live in, we used a builder called Plan Build. And I actually watched Plan Build and kept an eye on them for about 10 years before we built this house.

They recently went into administration.

See, back in 2007-2009, when the GFC (global financial crisis) came through, one of my JV partners went broke. And he was a builder, too. Now, we’re chasing him for about $2 million worth of damages.

I witnessed firsthand how he grew very, very quickly. From zero to 20 building contracts within 12 months. He was a super salesman!

He was doing contract builds for mum and dad’s on spec, (i.e. they were buying the land, building the houses and selling and making really good profits.)

So they were able to do it.

But the thing was, the market was very, very buoyant at that point in time.

He had a really good relationship with the local Ray White, and so he was getting deals off-market to them. And they were able to build with another builderת until he wanted to control the process and do his own build.

As I was saying, I got to see him from the ground up. He was trying to do everything in-house. Had an architectural team. His own finance business. And so I saw ALL OF THAT collapse during 2009-2010, which was very, very scary for me.

Luckily I got out pretty much unscathed.

We had a land subdivision deal together, which were able to exit.

Ever since, I’ve been very, very cautious when dealing with builders.

So here’s my critical lesson for you

Oftentimes in boom times, people really get gung ho.

They pull the trigger. They sign build contracts. They sell houses. They buy houses.

And one of the biggest things about construction is that construction prices go up.

So you sign a bill contract in January. And then the prices go up, which is what happened during COVID. Supply chain issues, materials gone up 20% to 30%,

But the contract was signed 6 to 12 months ago, and by the time the builder is building or are finished building, they’re in $20,000 to $30,000 loss on that one build!

So and big part of what I learned during GFC was the saying:

Get in, Get out, Get paid!!!

And even during a land subdivision process, if there’s a chance to get out, that’s sometimes a good opportunity!

Look, even civil contractors can go broke! It’s not as common as building contractors. But it does happen.

I often joke that construction is 20,000-piece puzzle put together by 10 to 20 people… with blindfolds on.

But sadly it’s often true. People don’t communicate enough. They just don’t communicate.

You know, in my instance, with this place here, I did an extension on my existing house. I had a demolition application to knock down the place. It was pre-1946.

But the neighbour (who’s passed away now) took us to court. He got a petition in the street, such that they stopped us from demolishing this house. If you ever see the front of our house, you’ll see that it’s not very much a “character home”.

Anyway now that the neighbour has passed, I’m soon going to be applying for another demolition application. And hopefully we can organize for a demolition application to knock down the front or demolish the front half of our house, and put a brand new front on it.

But I digress.

My point is, the next 12 to 24 months will be interesting.

Some of the builders are already going broke.

And you’ll see more of them going broke!

You’ll see more developers who are doing apartments and townhouses having challenges keeping up with costs as well. And whether they lose money or they break even is going to be yet to be seen.

Especially with apartment and townhouse builders. That’s where a big majority of the development costs are in the construction space. Whereas land developers, I’m not saying they’re any better. They just have less construction costs.

But you know, if you look at Privium, you may see that they’ve got Privium civil, other building businesses that have civil costs in there. If they basically don’t have fixed-price contracts, they’re going to have trouble turning a profit as well.

Even though land prices have gone up, land developers are going to have to deal with this situation!

So there’s nothing wrong with taking a quick profit.

Getting a DA and flicking the site there.

That’s definitely what we’re looking at for a couple of our sites. There’s nothing wrong with that!

Take a quick profit and MOVE ON!

If we have to develop them, that’s fine. That’s where you need to have a strong balance sheet, a fair bit of cash behind you. Because it can take some time until you actually get paid (more about that in the video.)

Anyway, hopefully you’ve enjoyed this video. Please leave a comment below if you did 🙂

I look forward to catch up with you soon.

Nhan

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