I am increasingly seeing numerous situations where people have not considered the initial seed capital required for their property transactions and later down the line are coming unstuck with their cashflow. The amounts whilst relatively small can mount up considerably from a £1k to £10k+ on large conversion projects.
Many investors are utilising private investors capital into their deal structures however most private investors will be engaged on a deal by deal basis and there will, in all probability be a time lag between fee & cost commitment and outlay, prior to private investor capital injection or first draw down on development finance.
Worryingly there appears to be a trend towards using basic deal analysers and assuming incorrectly in my humble opinion that these will suffice to manage the full deal transaction through to legal completion and beyond, with little or no consideration on cashflow timing and the potential that every now and again sunk/non-recoverable costs will be incurred when deals fall over prior to exchange/completion.
It is of paramount importance in my experience to ensure you understand not just the accuracy but also a very detailed forecast of your cost base. One should then also consider carefully the timing the costs will be incurred in cash terms and incorporate these into a clear forecast of your initial invested seed capital so this can be provided for accordingly, and subject to private investor agreement, potentially ‘made whole’ at exchange or completion.
If you require private investment to fund the initial business diligence at the front end then as long as you are aware of the quantum and timing and your investor understands the risk v reward profile, then this can be navigated. Note though that speed and agility during acquisition of assets usually means that initial seed capital is more than likely going to come from you as directors or shareholders prior to exchange of contracts.
Another tip that you can possibly negotiate is fees from your professional term on a fully or partial contingent basis however track record is often required for this level of trust.
This challenge which we all have to contend with applies to most property transaction types and increases in potential magnitude as the scale increases from BTL’s through HMO’s to commercial conversions and developments.
We discussed the seed capital requirement at length at our Commercial Conversion Forum, now the Commercial Conversion Business Academy, last Thursday before Brooklands and I had a number of follow up queries hence raising this as a specific point of focus for your EQUATIP.
The larger the deal tends to raise the initial tranche of seed capital and also the duration that it is required for as private investor capital may be primarily down through to the business after a lengthy period of exclusivity through to exchange and perhaps even completion.
I hope this has been useful in helping you understanding another angle to de-risk your property business.