How To Balance Financial Shortfalls During A Building Project?

Ever been to a buffet? One of those coronary, ‘All You Can Eat’ ones? Pay once and keep going back for more. And no one really cares. Right? Except perhaps your heart surgeon.

Do You Need A Heart Surgeon

When it comes to financing your project, you don’t really need your heart surgeon right there by your side. If you’ve done ample preparation, everything should flow seamlessly. And without any stress.

Let me explain.

Anyone who is building a house will know it is going to cost a whole pile of money. The three critical questions you need to ask yourself are:

  1. How much do I actually need?
  2. How much do I have?
  3. How will I make up the balance?

It’s as simple as that.

So, how much do you have?

Well I can’t answer that, but usually we find the average Joe usually needs to borrow at least some money from his friendly bank. And we all know banks have loads and loads of cash that they are just dying to lend to you.

But, they also have a whole pile of conditions of how they will lend you the money.

Some of these are:

  1. You’ll need to show them that you have some money to put towards your project
  2. You have a reputable company undertaking the project for you on terms of a fixed price contract
  3. Risk areas have been identified[1]
  4. A valuation of project upon completion is required

Now I’ve never worked for a bank so please check the specific conditions with your bank.

Be Very Very Careful As To How You Will Fund Your Project

Occasionally I run into some naive people. And I know you’re not one of them.

They’ll get a quote for their building project. And that could be a number, let’s say $500,000. They also have some money to put towards the project. Let’s say they have $100,000 and they’ll go and borrow $400,000 from the bank. So that’s great, everyone’s happy…until the project starts.

The Projects Starts, But What Changes?

We all know that with the construction of a house, there are certain things that will inevitably end up costing a little more. And these are mainly due to unforeseen situations.

Also, you may survive the construction unscathed. But then at the end, there is a whole load of additional ‘stuff’ that needs your buckaroos as well. Furniture, window coverings, landscaping amongst other things.

Like it or not, there’s always bound to be additional costs that will crop up one way or another.

So, Are You Prepared For That?

And have you got access to additional funds, should it be required? Don’t cut yourself short and only borrow what you need. You need to have a buffer. So, in case of emergency, you could go back to your bank.

Or you haven’t used all your personal funds in the house, and you’ve got some spare to actually manage some of these additional cost overruns.

Realistically, the house cost is likely to change. And this is usually upwards! The only way you can mitigate that, is to have a bit of a pre-arranged financial buffer.

So, What Should My Buffer Be?

I can’t tell you. It really depends on a myriad of factors, some of which are:

  1. Site conditions
  2. Size and complexity of house
  3. What Provisional Sum allowances have been allocated[2]
  4. How strict YOU are with your budget? Will you change anything during construction(trust me it always happens)

The Trick Is To Engage A Reputable Builder At A Fair Price

Discuss the contract in detail. Be aware of what allowances have been made. Ask questions as to the areas where budget blowouts could happen.

If you go with the cheapest rogue in town, then you will most likely need to allow for a significant increase in construction costs. Cost increases of 10-20% are not that uncommon.

If You’ve Got A Very Thick Wallet, Then No Problem

No reason to stress at all. But, if you haven’t. And are depending heavily on the bank, then they don’t have a ‘All You Can Eat’ buffet. They could deny additional lending if you don’t meet their ‘criteria’.

You need to make sure that you are very comfortable that your project can realistically be finished in the allocated borrowings. And of course, that you’ve got some spare cash to splash on the creature comforts when it’s all finished. If you haven’t, then perhaps keep your surgeon nice and handy 🙂

__________

[1] Please see article on Risk

[2] Please see article on Provisional Sums

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