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Essentially I mean a very sure fire way to recover the $1M so you can pay it back on time.
You need very good risk management in place.
EG#1 Put the $1M in a 12 month fixed term deposit account at the bank.
Returns : Unspectacular
Risk of being unable to repay the $1M : Close to zero
EG#2. Build a property and sell it.
Retuens : Good, especially as your not paying for the use of the $1M for the year.
Risks:
1. The resource consent, building consent, final sign off, architect, builder, take longer than planned, and your completion date slip close to or past the 1 year mark. If the MUST pay back on time you are now in trouble.
2. The costs blow out, and you $800K project actually needs $1.05M to complete. If you have no other funds you are in trouble.
3. The sales process takes longer than planned (in getting an offer at all, or settling before your 12 month limit). If you have to repay on time you are in trouble.
4. The sale process fails (not all listings are selling, even in "nice areas". You'll have to sell it for less than "market value" to ensure a quick sale)
I could go on.....
So, what are the consequences to you if you do not repay the $1M on time, in full?
Any guarantee offered to you by a subcontractor (ie builder) MUST have teeth, and must have the same or greater consequences for the sub-contractor as a default on the $1M has for you (in others words pass the entire risk down the line).
You need very good risk management in place.
EG#1 Put the $1M in a 12 month fixed term deposit account at the bank.
Returns : Unspectacular
Risk of being unable to repay the $1M : Close to zero
EG#2. Build a property and sell it.
Retuens : Good, especially as your not paying for the use of the $1M for the year.
Risks:
1. The resource consent, building consent, final sign off, architect, builder, take longer than planned, and your completion date slip close to or past the 1 year mark. If the MUST pay back on time you are now in trouble.
2. The costs blow out, and you $800K project actually needs $1.05M to complete. If you have no other funds you are in trouble.
3. The sales process takes longer than planned (in getting an offer at all, or settling before your 12 month limit). If you have to repay on time you are in trouble.
4. The sale process fails (not all listings are selling, even in "nice areas". You'll have to sell it for less than "market value" to ensure a quick sale)
I could go on.....
So, what are the consequences to you if you do not repay the $1M on time, in full?
Any guarantee offered to you by a subcontractor (ie builder) MUST have teeth, and must have the same or greater consequences for the sub-contractor as a default on the $1M has for you (in others words pass the entire risk down the line).
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