Scenario: Developer plans to do 10 spec homes. $3M project total.
Funding: Gets private investor for $3M and offers $3.6M return as lump sum after 2 years.
Project goes well: Land developed, homes built, home sold <2 years = everyone's happy
Project Delayed: Homes don't sell <2 years, developer doesn't have funds to continue paying investor 10% apy.
Investor won't carry risk of homes not selling and losing interest, but developer can't afford that risk either. How do you make a more attractive deal?
Is there some type of contingent liability insurance that can be purchased that would continue paying the investor their 10% until all 10 homes are sold?
Tl/DR: When funding residential developments, who carries the risk of the market downturn/low demand? Developer, investor, or insurance company?
Note: I've oversimplified this to keep the focus on my main question regarding risk.
How do residential developers structure their private loans to protect against market downturn during development?
byu/New-Ad4890 inrealestateinvesting
Posted by New-Ad4890
2 Comments
Right now in Canada developers are going bust at a huge rate because of the market downturn. So the answer is bankruptcy lol
**Tl/DR: When funding residential developments, who carries the risk of the market downturn/low demand? Developer, investor, or insurance company?**
Whose money is at stake if it goes sideways? Developer can just go out of business and lender needs to chase him. I don’t really think anyone would write some sort of performance insurance, hence the risk = higher interest rates.