When people talk about the “Worst movie of all time” they usually start with Plan 9 From Outer Space, a no-budget sci-fi flick that combined terrible acting, laughable special effects, and zero plot coherence. But yet the director, Ed Wood, started out with a confident vision and a lofty goal. He didn’t try to make an epic catastrophe. No one does. It may not always seem so, but every disaster starts out with a plan and a goal. It’s just that the plans are often met by terrible obstacles (in Wood’s case, he didn’t know anything about making movies). It’s a lesson that should be taken into account when applying for a loan for ground-up construction. What you don’t know really can hurt you, so make sure you know as much as possible before you proceed.
In every construction project there are hidden costs and unforeseen barriers that can damage your plans. That’s bad news at any time, but especially when you are applying for a loan. After all, the amount of money you get from your California ground-up construction lender is based on your plan, and if your plan doesn’t take everything into account, you could find yourself quickly underwater. More immediately, if your plan seems unthought-out and unrealistic, you might not get to loan in the first place. So while it seems odd to plan for the unforeseen, there are some “known unknowns” that you have to take into account to make sure that your plan is as realistic as possible, both for the lender and yourself.
The Danger of Optimism Bias
Perhaps you have heard the aphorism “the triumph of hope over experience” (often attributed to second marriages). It’s a funny thing to consider, but it indicates a real part of the human psychological condition. Unfortunately due to this condition, many people don’t recognize something that went wrong for them before and even worse – don’t assume that it is going to go wrong again. Instead, they move blindly ahead, thinking that their “bad luck” was a thing of the past. This is known as “optimism bias.” Basically, we believe things will be different and better merely because we want them to be. It’s why people keep losing money at the track.
In construction, this can come into play when drawing up a timeline. Sure, on the last project, there was a worker injury that delayed things, and that week of awful storms, but that certainly can’t happen again, right? Maybe not, but these things always pop up. Weather changes moods. If you plan your timeline based on nothing going wrong, and make your budget based on that, you’re setting yourself up for failure. Not only that, but a lender may not think you credible. Give yourself some flexibility. It demonstrates real experience.
Technical Factors and How to Avoid Them
There are some other factors that are much less metaphysical that you also need to be aware of. These are things that can always go wrong:
- Supplies changing price. Sometimes there are good surprises here, like when gas prices plummet and the cost of shipping goes down. But more often than not, prices go up, and if you budget at one price you might find yourself in an early hole. One way to avoid that is to purchase everything as soon as possible. If you don’t need wire until 6 months in, purchase the wire now, at the price you budgeted. It may go down, but probably not, and if it goes up you’re behind the 8-ball. Also, as obvious as this seems, always take into account taxes. You’d be surprised how many don’t.
- Changing site conditions. Always perform an inspection. Even if you do so too quickly, you could still find say, a tricky subsurface that you didn’t see and could delay and add expense to a project. Always investigate the whole site before you lay out a plan, and make sure you leave yourself room in the planning stages.
- Subcontractor blues. Plans are often ruined because subcontractors show up at the wrong times, get in each other’s way, don’t finish the job they need to allow the next one to start, etc. This isn’t always their fault, but suddenly everyone is pointing fingers. Responsibility starts at the top. Make sure you have a meticulous calendar that allows contingency for natural delays (i.e. weather). A well-drawn calendar can go a long way toward showing the lender you know your stuff.
Starting a new ground-up construction project is an exciting risk. Getting the funding from a leading California ground-up lender can help get it off on the right foot. Careful foresight and a meticulous attention to detail can help make sure your plan doesn’t turn into Plan 9.
Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help.