Since my other thread (http://forums.taunton.com/tp-breaktime/messages?msg=97021.1) degraded into talking about P/U trucks ;-), I thought I’d post some follow-up stuff in this new thread.
Think of all this as theoretical – but the relationships between the numbers are correct. I understand this is lengthy, but I’d love some comments on my cash-flow curves and goals.
This is a letter:
Spent an interesting morning associating the bank’s supplied “itemized payment schedule sheet”, as it meshed with my time and costing planning (the categorized subtotals previously provided to the loan officer).
The goal was to develop a fairly accurate cash flow curve for the duration of construction. I developed three different spreadsheets:
1) Just as the bank proposed, with all $215K financed; no money down;
2) $25K down; $190K financed;
3) $40K down; $175K financed
I have made some assumptions – chiefly –
1) The project would take 40 weeks;
2) The bank would inspect and release funds to you, and you to me, within two weeks of my notification
3) My interpretations of the bank’s line items are correct as they apply to this particular house and construction methods.
Now, given all that, look at the attached spreadsheets.
The first, the bank’s way, paying out $215K by the bank’s schedule of percentages, shows that I stay significantly in the red for the entire 40 weeks, dipping as low as <$33K> down on week 23.
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The second spreadsheet, where you pay me $25K up front, and then pay out $190K by the bank’s schedule of percentages, shows that I dip into the red on week 7, and reach a maximum of <$21K> down on weeks 23 and 31.
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The third method, where you pay me $40K up front, and then pay out $175K by the bank’s schedule of percentages, shows that I stay out of the red until week 13, get back a little bit into the black in weeks 16-18, and also in weeks 27-30, and reach a maximum of <$18K> down on week 31.
View Image
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Obviously, I prefer this third option. Looking at the red line on that chart, you can see that my cash flow stays balanced for the middle of the project; is loaded at the front to get many things in motion, and lags at the end to give you completion and “punchlist” leverage.
Forrest – trying to learn from this one instead of just jumping in!
Edited 11/29/2007 3:49 pm by McDesign
Replies
forrest.... so what kind of pu are you driving ?
Rusty green '78 6-cyl GMC with a pipe rack.
Forrest
My point of view is that of the banker....don't beat me up too bad!
First, if sales price is $215,000, you shouldn't have $215,000 in costs unless you're working for no profit. Hopefully, that's not happening, or if it is, you're at least not graphing it out that way up front. That's kind of fatalistic thinking. So if your profit margin is 15%, you shouldn't be into your capital as bad as you're showing, and at the end of the project, you should be above $0, not right back to the line.
Second, I don't expect for bills/subs to be paid when I get a draw. I expect invoices to be provided, and I expect the work to be done before that work is paid for. If I fund a draw every 2 weeks, the longest any sub should have to wait for $ is 2 weeks, and that's only if they did the work the very first day of the period and it just took them that day to complete their job. I also typically advance an initial sum = to about 5% of the project that can be used to pay small bills and then reimbursed when a draw is turned in. This scenario assumes there is no set funding schedule.
If there is a set funding schedule, I would be a lot more inclined to require a big down stroke from the borrower. If you're getting $18K in the cash flow hole with this scenario, you might need to put in a couple of additional funding events to increase the number of draws from say 5 throughout the project, to 7 or 8.
I know it's tough on the builder, but it's tough on the borrower to get screwed for paying for work that never gets done, and it's tough on the bank when money is funded too far in advance that gets used on other projects or the builder skips town, and I'm foreclosing on a house that is 30% done and 60% funded. Danged if you do, and danged if you don't!
Tracy
Tracy,
I may be wrong but I believe this is a custom build not a spec.
And as to your last paragraph, that's just plain arrogance on the lenders part.
If the lender forcloses on the property, who now owns the land/lot that was presumably paid for?[email protected]
And as to your last paragraph, that's just plain arrogance on the lenders part.
That's not arriogance, it the facts. Do you think it's arrogance for a plumber to get $100 for 15 minutes of work on a service call? It's all in the point of view."Put your creed in your deed." Emerson
"When asked if you can do something, tell'em "Why certainly I can", then get busy and find a way to do it." T. Roosevelt
"And as to your last paragraph, that's just plain arrogance on the lenders part.If the lender forcloses on the property, who now owns the land/lot that was presumably paid for?"Why is it arrogance for the lender not want to loose money on a job?.
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
"Why is it arrogance for the lender not want to loose money on a job?"It is smart business...just like Mike is suggesting. Theres no sense gambling when you control the money and have the last say so. FKA Blue (eyeddevil)
Suddenly the bank now own an asset that used to belong to the builder, presumably.
That asset being the lot. So the builder defaulted on the building loan, has left a half finished shell and a valuable piece of land as well. A peice of land that really had no bearing on the rest of the loan process.
So lets say I borrow 150k to put up a small house on 30 acres of land I purchased at a nice sweet price. I've owned the land for sometime and it's value has gone up significantly. I default on the loan for the building and now the bank owns it all?
Assuming that is how it works that doesn't seem very fair to me.[email protected]
"Suddenly the bank now own an asset that used to belong to the builder, presumably."No, the bank does not own it. They FORECLOSE on the property.That means that it is sold "on the courthouse steps" in a bid. And if someone thinks that there is more value that what is own and so bids then AMOUNT OVER THE THAT OWNED GOES TO THE BUILDER."That asset being the lot. So the builder defaulted on the building loan, has left a half finished shell and a valuable piece of land as well. A peice of land that really had no bearing on the rest of the loan process.So lets say I borrow 150k to put up a small house on 30 acres of land I purchased at a nice sweet price. I've owned the land for sometime and it's value has gone up significantly. I default on the loan for the building and now the bank owns it all? "THAT HAS NOTHING TO DO WITH THE EXAMPLE THAT Tracy GAVE. And what you replied to."I know it's tough on the builder, but it's tough on the borrower to get screwed for paying for work that never gets done, and it's tough on the bank when money is funded too far in advance that gets used on other projects or the builder skips town, and I'm foreclosing on a house that is 30% done and 60% funded. Danged if you do, and danged if you don't!"First most houses are not small house on 30 acres. They are build on small tracts.Next the lot may be owned by the builder if it is a Spec. But in this case we are talking about a building for the HO. In that case the HO owns the lot.But even if builder owns the lot. Lets say he paid $30,000 for it.And is borrowing $150,000.Based what you said was ARROGANT he has gotten $90,000 from the bank and only done $45,000 worth of work.So the guy has skipped town. The bank then forecloses and bids what is owed $90,000.For that they get something that has a face value of only $75,000 at BOOK VALVE.And there have been several different threads where it is the HO or a sub that was owed, or a someone that ends up taking over such a project.Although there was $45,000 worth of work done, there is not $45,000 value there in the construction. First the project sits 3 months to a couple of years while the legalities are straighted out and finds someone that is willing to take it over. During that time the structure is weather damaged, materials are stolen, vandalized.But even if none of that happened just the effort of taking over a job, figuring out what has been done and needs to be done, checking permits, checking the quality of what was already done, trying to fit the other contractors practices into his, etc is going to cost extra money..
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
You posted while I was typing. Well said.
And.....you seem to have my problems pretty well in hand. I might need a new business! : )
Bill,
I'm not going to argue/hijack this.
Maybe I'm not thinking straight (golly gee)
And saying that thirty acres should be subdivided is irrelevant.
If I own the land, get a loan to build a home for myself and for some unfortunate reason default on the loan, the bank can sell/auction off the property that I own for less than it is worth and I am SOL.
Lets say that I have payments up to date on the loan, the money has all been put into the building, so every penny the bank has given (loaned) me has been put into building the home. Roof is on and windows and doors are in. Nice dry shell.
My wife gets sick and I suffer an injury. I fuddle about for a couple of months struggling to get something done to hold off foreclosure. The bank defaults on the loan and auctions it off for the value of the land.
This is the nightmare I had. Fantasy perhaps. Maybe only my warped mind can come up with something like that.
So that is all I was thinking.[email protected]
You are making up a completely different scenario that has nothing to do with anything that has been discussed here."And saying that thirty acres should be subdivided is irrelevant."No body said anything about that. But if you have the difficulties that you describe that might be a wise move in the end."If I own the land, get a loan to build a home for myself and for some unfortunate reason default on the loan, the bank can sell/auction off the property that I own for less than it is worth and I am SOL."No, not at all. The bank can't auction off anything.If it is a mortage then the sherif or other court official will handle the auction. If you are in a trust deed state then the trustee will handle the auction.The bank does not set the price. They will start the bid at what they are owed. Not what the price of the land is.If the land was that valuable then some one might buy just for the land. And whatever is left over after the bank is paid off goes to you."Lets say that I have payments up to date on the loan, the money has all been put into the building, so every penny the bank has given (loaned) me has been put into building the home. Roof is on and windows and doors are in. Nice dry shell."But again that has nothing to do with the discussion. The about where EVERY PENNY DID NOT GO INTO THE BUILDING. The discussion was about the builder gettting AHEAD OF THE BANK..
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
But again that has nothing to do with the discussion. The about where EVERY PENNY DID NOT GO INTO THE BUILDING. The discussion was about the builder gettting AHEAD OF THE BANK.
Actually the discussion began as a "builder ahead of the bank" where the financing was coming from the builder to make up the gap of what the bank was not putting forth.
Lets say the builder is ahead of the bank expecting a check from the HO and the HO defaults. The builder is now second leinholder. He may as well be holding a bag of sh1t!
No body said anything about that. But if you have the difficulties that you describe that might be a wise move in the end.
You did Bill. You stated that it was unlikely for a single family home to be built on 30 acres. Not unlikely if you are in a rural area.
The bank does not set the price. They will start the bid at what they are owed. Not what the price of the land is.
Exactly my point. If the property gets auctioned off for less than it's value, or what the land owner has in to it, that he is sol. This is not unheard of.[email protected]
It's not a nightmare and in fact it really does happen. But if it happens, why should you make your problem the bank's problem?I'm no fan of banks but I admire the way they protect their assets. If you read the book "The Richest Man in Babylon" it is one of their golden rules. FKA Blue (eyeddevil)
Obviously I am being misunderstood.
I am at a loss as to express myself another way.[email protected]
I think your are expressing yourself well. You obviously are frustrated that the banks have so much power.Put yourself in their shoes though. Imagine funding some GCs project and risking 200k of hard cash. You take it out of your bank account and hand it over to someone and they tell you that they will perform and pay you back.How many controls would you want to protect that 200k? How easy going would you be when the interest payments stopped and you had to turn it over to the lawyers to collect? FKA Blue (eyeddevil)
Thanks.[email protected]
I am in banking, and have worked as a lender for over 12 yrs, total in banking of 16 years with 2 banks.
I wasn't trying to be arrogant, just giving my point of view, as well as the builder's and the homeowners, all in the same last paragraph. Everybody needs to take care of themself.
I assumed it was a custom home. What I wasn't clear on was the "cost" to build for the builder versus the sales price, or "cost" to buy for the homeowner. If it's turn-key for $215,000, then McDesign's cost won't be $215,000.
There's 2 scenarios for a custom home. The builder owns the lot, either via a mortgage or outright, and builds to suit, and gets the loan in their name. He's/she's still going to make a profit above the "cost". I'm not interested in lending the profit on the front-end. Adequate profit for the amount of work done works for me, with maybe some kind of retainage to keep the builder interested in finishing. The second scenario is where the customer owns the land, or purchases it with proceeds from their construction loan.
All banks are different, with different policies for disbursing loan proceeds. McDesign might be having to deal with a bank that he is unfamiliar with because it is the customer's bank. There's no background with the lender to make everyone feel all warm and fuzzy. If McDesign is working with his bank, and he's always been wondering why, if he's got all of this great, profitable work, but always has a cash flow issue, so he's working out his spreadsheet, then he needs to take it to his lender, explain his position, and maybe reach a compromise, such as what I suggested, add a couple more disbursing points to make it more manageable.
And anytime you (or any builder) has a sweet 30 acres all bought and paid for, and want a construction loan, probably for about 1/2 of the overall value of the project, you just head on into my (or any) bank and we'll probably be doing backflips for you. And if you've never seen a 230 pound, out-of-shape, banker in a suit doing backflips, you'll be in for a treat!
Tracy
Thanks again. Just want to make clear, I could build the whole darn project myself, now, on the land the client currently owns outright.
The issue, instead, is how successfully can I make the job "self-sustaining" during the construction process. It seems to makes sense for the job to pay me during the process - not at the end; so I distributed the profit throughout the entire project in my calculations.
Here, I'm "pushing back" from the way I've normally handled cash flow, to see what develops. I suspect some sort of compromise will be reached that leaves everyone pleased.
Forrest
Hey thanks! That's just what I hoped for - a banker's perspective. The payment schedule and percentages I'm using were supplied directly from the lender in question.
I hope the client will put money up front, and finance the balance (scenario #3). I feel they should assume the most risk (for their dream house), and the bank can then feel good about paying by its normal schedule as its desired milestones are completed.
Does that make sense?
Talk to me!
Forrest
Forrest, I don't think he said he's a banker...he said he was speaking from the bankers perspective.I think it's important that you explain whether you are paying each sub and tradesman cod or are they billing you? What are their terms? FKA Blue (eyeddevil)
<OccupationBanking/Financial Services/Real Estate
>
From his profile.
I don't think it should matter to the client how, or when, I pay my subs, or how my business plan is structured.
You could imagine, though, that as a small builder, my only leverage is paying my trusted subs IMMEDIATELY, and that they would know that.
Forrest
"You could imagine, though, that as a small builder, my only leverage is paying my trusted subs IMMEDIATELY, and that they would know that."Its nice that you want to preserve that relationship with your subs.One time Frank came to me and complained that one of the builders we serviced wanted some work done. We needed the work because the downswing had already affected us. Frank wasn't too thrilled because this builder "was a slow payer". I pointed out to Frank that the builder was slow, but he did in fact pay. I had him calculate the amount of interest it would take to borrow the funds to float that builder until he paid. I think we figured about 20k for three months at 8% even though the builder would probably pay us in 30 days.It came to about $400. At 30 days, it would cost us about $130 for the use of the money. I then asked him how much more per sq ft we were getting from him because no one wanted to work for him because of his slow pay reputation. I think we were getting a premium of a couple thousand dollars per house as compared to other builders in the area. I told Frank that I'd be willing to fund the loan if I could keep the premium. He decided to take the job without grumping about it.The point is that the cost of money is a factor and nothing more than a factor. Most business start up with some form of capitalization and often they have a line of credit that smooths out the rough spots. Small builders and small gcs and especially small subcontractors seem to think they should be able to run a business with no capitalization and no line of credit. You certainly need to keep a tight lid on how much you are upside down, but you also might be better off to be flexible in your approach to handling the short term cash flow problems. Mike has a program that makes sense in his market, but your market might not operate like that. It doesn't make sense to lose a job because you might incur $1000 dollars of interest payments. Just mark up the $1000 as an expense and charge them $2000 for it and then you can feel good about making money like a banker. If you really want to ratchet up the return, take out one of those interest free loans on your credit card for 6 months and pay it off at closing. FKA Blue (eyeddevil)
"I don't think it should matter to the client how, or when, I pay my subs, or how my business plan is structured.
You could imagine, though, that as a small builder, my only leverage is paying my trusted subs IMMEDIATELY, and that they would know that."
McDesign, addressing your first point, it seems like your business plan and when you pay your subs, is your primary problem. Cash flow going out as opposed to cash flow coming in. If you can't get a 20% down job and stay in the black for the whole time, it seems like you might need to rethink some things.
And, with your second point, you have trusted subs, and I'm sure subs list you as a trusted general. I don't think you will lose their trust by going to them up front, and telling them that you can't afford to use your capital to pay them for someone else's project any longer. That you have gone to the bank and arranged to turn in draws for all work completed (or some percentage completed) every 13th and 28th of the month, and that the bank has guaranteed you that with a satisfactory inspection, you will have your money by 10 am on the 15th or last day of the month, and that you can pay them at that time.
And, you can always treat some subs different, with your capital or your project's down payment. If you know your painters need paid on Friday, and you can get reimbursed on Wed of next week, and you've got the $5,000 (or whatever) to pay them, and you get a 5% discount for paying the day the job is finished, go ahead. But as a business plan, the more of someone else's cash you can use, the better.
"But as a business plan, the more of someone else's cash you can use, the better."
I'm butting in here, but....
When your subs KNOW they are paid upon completion, they are at the ready to adjust their schedules to yours. That is CRITICAL to a one-man (small crew) show.
When the surprises happen, they are much more manageable if a sub can squeeze in a few hours to move the project along.
The subs' money is the last place to borrow, and then only if it is pre-arranged, temporary and small. Liberty = Freedom from unjust or undue governmental control.
American Heritage Dictionary
I don't think it should matter to the client how, or when, I pay my subs, or how my business plan is structured.
As a client, I'm VERY interested in how careful our builder is about paying subs--both in making sure the work is complete and correct AND in fully paying the sub in a timely fashion. And while the details of a business plan are not of concern (and a written business plan not essential from my perspective as a client), I like to know enough about how a contractor runs things to know that he/she is not going to go belly-up in the middle of my project.
Along these same lines, if I were a builder I would want to know enough about the client's financial resources and spending habits to know that the project would not come to a screeching halt because all the money was gone. And I'd want more than just the client's word that the money was available.
Don't know about construction, but in the world of software development I've known a number of EXTREMELY talented, honest people whose small businesses failed because they didn't know how to run a business.
Kathleen
Good post.
I work with banks and subs and suppliers all the time. Here's the easy way for me. Pay subs, suppliers immediately, demand best deal. Have more cash in the bank than you are looking to borrow on the property, demand best deal on the loan.
In short, have a big pile of cash,
skipj
Hmmm? Are you suggesting that it's good business to be well capitalized?Horrors! Who'd ever thunk something like that?!!! FKA Blue (eyeddevil)
Jim,
I recall being told that 'the bank pays on the 10th' and wondering how I could pay my guys on the 15th, 22nd, 29th, and 5th. For the next job that 'the bank pays on the 10th'. So, I quit doing it. At all ever. The first hint, ...'my husband has the checkbook, and he needed to talk to you anyway...'. What's his number? We need to talk right now.
I started showing up with preliminary lien notifications, and a pocket full of change orders, and a pen. Sign here, here, and here.
I started to pass on work I deperately needed, and resolved only to take work I wanted. I quit saying yes.
So, yeah. Having capital. It's a good thing, and, work is a choice.
It wasn't for me until I learned to say no.
skipj
sorry ( not really ).... but i couldn't resist
hey !... nice charts !
i never charted any of my jobs... but it did finally dawn on me that i had to do one of two things....
either get substantial deposits and timely payments tied to costly job events
or...
get a whole lot of working capital into my business
i had no source of working capital.... other than borrowing it
so , i've decided that the one who benefits is the one who should pay...
the Homeowner is the one who benefits, everything that is expended on the job accrues to his benfit... the only thing that accriues to my benefit is my reputation
and cash flow endangers my reputation... with my vendors, my subs, my employees, my family
come hell or high water... at the end of the project .... i'm going to get the contract sum
so .... why shouldn't i set up a payment schedule that is going to be another one of the tools i rely on to accomplish the mission....
a well run, well executed job.....
show me the money
i bring the labor and management... the Owner brings the money
your charts illustrate the problem very well... you ought copyright the things and make thme part of your presentation so customers can understand why traditional bank payment schedules screw up the worksMike Smith Rhode Island : Design / Build / Repair / Restore
Damn,
Beat me to it.
If your client will not buy into the big deposit up front try loading the footings, foundation and rough framing with a disproportionate amount of the profit. (front loading the contract) you'll be in the red until the tarpaper is on the roof, then in the black until final trim and possibly until the end of the job. The bank will be more likely to accept your schedule of values than a big down payment but they essentially are the same thing. Only works if your on a fixed price contract with a negotiated schedule of values.
m
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"You cannot work hard enough to make up for a sloppy estimate."
Forrest, real businessment know how to use borrowed capital to make money. Their bank loan officer should be just a short ways down the speed dial list.
Too many contractors, just like other small business owners, have not learned to think about business financing as a means of regular operations, and as a means for greater profitability and growth.
Take the banker's advice and discuss a new arrangement for payout for your subs, then try to schedule their work so the payout times come close to draw times however possible.
Work with the bank to get more events in the draw schedule. They would like one easy payment at the end, you would like fifty at three days' spacing. They might be offering four now. Ask for a total of twelve, and be willing to settle for six or seven. You might get more.
Firm contract price still open? If so, build some financing costs of your own into the price, a conservative amount that will cover all your float interest and other costs on the as-needed dip loan you'll need for the duration, and then just relax and go to work.
Front load your schedule as much as you can.
And try your best to develop some new subs that are not so hand-to-mouth.
"Forrest, real businessment know how to use borrowed capital to make money."Gene, I'm going to step in and say that I don't think you are implying that someone that wants to operate without a credit line are NOT real businesses. I've never known you to make abrassive posts so I'm sticking up for you here. I agree with your point that it's very easy to establish yourself with a local banker if you have any track record at all and a decent credit score. I don't necessarily agree with your suggestion to "develop some new subs that are not so hand-to-mouth.". His subs might very well be able to carry him on credit becauase they carry all their other builders too but everyone likes to work for fast payers; I know I do. Stpehen already pointed out one of the benefits of being a fast payer. As a sub, we ALWAYS bend over backward for fast payers. We do a great job for all payers but our backs only bend for the fast payers. FKA Blue (eyeddevil)
Jim, I am not demeaning those who choose to operate with no credit. I should have said, instead, that most often in small business, it is difficult to raise yourself up to the next level of volume and profitability without using credit as a resource.As for subs, I am not currently building houses (precious few are here where I am), but as I progressed through the few I did in the last few years, I was able readily to shed just everybody that needed a weekly check. Excepting direct employees, of course. Sorry, but I just got so I could not really get along with the subs that needed a Friday check each week. It just did not seem right to me. I spent too many years in commercial work where that just simply does not happen.And when I was building houses, I wasn't really doing it as a need to support myself, but rather as a full-time-interest-as-a-retired-guy, enjoying every single bit of it, but making sure to run it as a business just the same. I did just fine. I have morphed now into a solo operator, designing and building kitchen installations, and the payout is just about as good as housebuilding, with a whole lot less effort. And no subs or employees, either.If I were to build again right now, I could readily make it to draw number one (capped foundation) without having had to already pay a sub or supplier. I would have structured the payouts so that draw two would be tied to structural frameout only (sheathing, roofing, dry in, doors and windows next draw), and the load from draw one would carry me through there, too, without need for a dip.Draw three comes close next, total dry in with enclosure, and I would still be good.The only subs I would really be using that would need quick pay and could not wait until a draw event are the roofer and drywaller and finisher, and their work comes so close to draw events that the money lag is really minimal.Those I could have do excavation, sitework, plumbing and heating, electrical, special carpentry, sheet metal, masonry, and painting, all are well financed enough to wait a little after invoicing to be paid.As I have already said, the contract between GC and owner needs to stipulate the owner make an initial payment (a "down" or "deposit") substantial enough to get the GC to draw number one, and then with the draws done correctly, and the profitabiliy there, the GC should need very little interim jolts of cash from then on. Designed as a line of credit, the properly constructed loan agreement keeps everything going just fine.