Risk Management in Real Estate - Idan Avivi - Entrepreneur of the Week - Post 5

Risk Management in Real Estate - Idan Avivi - Entrepreneur of the Week - Post 5

#EntrepreneuroftheWeek #RealEstate #Flips #BuyAndHold #BRRRR #Mortgage #Investors #RiskManagement

For those of you who remember the introductory post, I started my career as a project manager for information systems at a high-tech company. As part of project management, I managed budgets, teams, schedules and the like and this of course helps me a lot in managing construction projects today but the most important thing I took is risk management!
Investments by nature are also risky, some more and some less so but there will always be some risk element in them. The beauty is that we have the ability to reduce risk even significantly by a well-organized risk management plan with pre-prepared contingency plans.
I have put together some ideas that can help in risk management in investing in new construction that have kept us vigilant and helped us easily overcome several crises (Corona have we already said?!)
Let's start with the business plan - it must be as conservative as possible! At the end of the day the numbers tell us a story and if the story does not end well then do not start reading… Do not try to reverse and renovate the numbers for a business plan to succeed. This is not good for you and certainly not for your investors.
The business plan must include all (I emphasize) all costs. Costs of purchase, closure, construction, financing, related expenses and everything that needs to be spent on the project. This sounds obvious but it is important not to round corners.
Always add Actra money and time to the project because there will always be some UAVs. This is still new construction and there could be thousands of reasons for delays so to be prepared accordingly.
Perform comprehensive field tests - work with a checklist every time a new project comes in so that during the due diligence period you will not miss anything that you will regret later. The checklist should include conducting a survey, making sure in front of the building code at the municipality that you can build what you want, checking soil and loads, and that way you will know that you are embarking on a project that you are 100% sure you can perform. It has already happened to us that following a load test we dropped a project because the ground was too soft for the house load.
One of the main risks for me is financing. After all, we get help with a construction loan and if things are delayed and we have to keep paying interest every month, it can create problems. We have two main solutions on the subject:

For each project we raise the cost of the space along with all the associated costs (architect, demolition of the house etc.) and so we take and start paying on the construction loan only when we physically start building. So if there is suddenly a mysterious virus called corona and we are in the middle of preparing architectural plans then the project will indeed be delayed but the fund of investors will not be harmed because we are not yet repaying interest.
We reached an agreement with our contractor for the route of a fine-award. If he meets the deadlines then he will get a few more percent, but if not then he will pay the interest of the construction loan in our place.
Advertising the property for sale - The advertising is done as soon as we have plans approved by the municipality and we advertise the property “on paper”. This leaves us several months until construction is complete and gives us plenty of time to sell the property at the target price we set.

Continue reading on our site…
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