You should pay the whole amount cash, not in order to receive a deduction in price, but so as to receive a priority in our list of pending projects”

Part 3
of the post “Do you like “role games”? Let us play the… residential developer
To read part 1, please press here
To read part 2, please press here

Mr X is a serious successful medium size developer in his country. After having heard so many people talking about Romania, he decided to come over here and invest as well, targeting bigger profits than what he could earn at his place (do you know anyone who would leave his country in order to earn less than back home?). Until to buy a land and to have it ready for development, it took him 24 months, a period throughout he already had invested:

First and second phases figures:

Finally, ready for construction and sales!
Since his first visit in Romania, Mr X needed almost 2 years until the moment he would be able to start developing something. He spent 7 months until to purchase a property and another 17 months until all the approvals were received. At that moment he was able to start constructing and also the pre-sales period could open as well. He had been prepared himself quite good for all these and he was almost anxious in order to “enter into action”.

Construction companies: “Too busy” for a project of “some million Euro”…
During this long period, he had also reached an agreement with a construction company as well. He had decided that it would have been too risky for him to start his first project by organizing the construction site himself, hiring different local professionals to do each job. It is not easy for a foreigner to overview such a development, except if he is ready to be all the time in Romania, all the day on site with the workers (and not by himself, but with a team of entrusted people covering him, to overview all). 80% of the developments had been appointed to a construction firm, plus the banks loved it too (easier to control the construction progress etc). Finally he had also heard about foreigners who tried to develop by themselves and they lost their money, while even local developers “knew that some of their people steal them”. This was why he chose a “serious, not small construction firm”.

He had come in Romania in the end of 2005. He had started discussing with the construction companies during 2007. And he couldn’t believe to what he was listening… Most of these companies were “fully booked until 2009 – 2010″. It was not easy for him to reach their owner, or director, in order to discuss for a project worth some million of Euro. Most of them were always “busy”. And they were indeed. They had tens of inquiries for projects, plus usually they were developing their own projects as well. Prices were changing almost every week or month at the most. He struggled to find some people, in order to discuss with them. (Thank God there was always a serious minority to work with, but prices were high…)

“You should pay the whole amount cash, not in order to receive a deduction in price, but so as to receive a priority in our list of pending projects”
A foreigner could not understand how was it possible to hear people telling him that there were no deductions in price. “You should pay the whole amount cash, in installments by the progress of work. Like this you will not receive a deduction in price but you will receive a priority in our list of pending projects. His limits for negotiation were quite thin. He had to choose between these people and some others who offered him “super prices”. But when he asked them to check some of their previous works, either they disappeared, or they showed him some buildings which looked like been shaken by an earthquake (and they were delivered in 2005 – 2007). When he was brave enough to check the quality of the finishings in these projects, he felt pity for the people who would live in there.

600 Euro / sq.m. = 720 Euro / sq.m.
The last months of 2007 were the period when the construction started, but in the same time it was also the moment when the prices of materials exploded. Steel, oil… everything that is necessary for a construction had reached a crazy price. During this period Mr X had to choose: Either to accept higher prices, or to arrive in court, fighting with the construction company, something that could really destroy his project and delay him even more. He was advised to accept higher prices. So, despite the initial agreement for 550 Euro / sq.m., after 2 additional acts in the contract, he finally calculated the total cost at 700 Euro / sq.m. for the 10.000 sq.m. he was allowed to develop over ground. In this price he also included the cost of connection to utilities, some minor issues that appeared, plus the area’s arrangement after the construction’s end.

400 – 450 Euro / sq.m. = 550 Euro / sq.m.
When he had been buying the land and at the period of authorisations, he had asked several people regarding the level of water under his land. It was quite high and he would have to develop two underground parking levels in it, plus the foundation ofcourse. Everyone had been telling him that “it is not a problem to build in the water, this is usual in Bucharest, we have solutions on this”. This was true, there were solutions, but their cost was significantly higher. He was hoping to keep his costs at the range of 400 – 450 Euro / sq.m., but in the end he finally paid about 550 Euro / sq.m. for the 2.500 sq.m. he built under ground, plus the special foundation he had to build. He also refused to “place less steel” or other materials, as some people told him that “it happens sometimes”. He didn’t want to trick his clients.

Construction costs
As the contracts were signed, it was impossible for him to renegotiate when the prices dropped in 2009. The constructor also delayed him several months, “due to different excuses”. Also, during 2009 the bank loan did not cover anymore 80% of the cost, but it dropped to 70%, which was still generous, comparing to so many other projects which stopped. Also the interest rate grew from 4% to 5%, as average for the whole period of construction. So the final cost of construction for him (including the person he brought from his country to be present on site during the development and all other costs):

Construction’s figures:

In the same period he had to pay for the interest rate of the loan the following costs:

His investment’s route

So the whole development costed to Mr X in 4 years time:

• 14.883.850 Euro

• Out of which, 9.832.500 Euro loan

• And 5.051.350 Euro he invested cash from his own pocket.

• 400 working days of his life

• Plus another 160 working days he lost, in order to return to his routine

(I will not calculate the cost of his day or the interest he lost if he would have kept his money in his bank)

So, let us all discover tomorrow what happened to this gentleman, who came and invested in Romania approximately 5 million from his own pocket, in order to develop a residential project with respect to his clients…

On Wednesday, 14.07:

• “For sure you can sell with 2.500 Euro / sq.m., I guarantee to you”

• “We don’t negotiate or give to them too much. If you teach them like this, you will spoil them”.

(Necessary clarification
Please allow me to clarify something: I strongly believe that a big part (maybe half) of the residential developers being active in Romania today are people who either were tricked while chasing easy money or they developed on purpose bad constructions, in order for them to cash in more money in shorter time. But for every developer who behaved like this, I also meet one more serious, professional, with strategy and plans. A person or company who tried to develop something good, with respectable quality, civilized, aiming to build a strong brand name and to achieve his clients to be happy for buying his property).