246 | HOW TO WRITE A BUSINESS PLAN
p
roject developments differ from
normal businesses in several ways.
Most impor tantly, the development
business ends when the project is sold.
That means that the developer normally
knows the selling price of the project before
beginning development, and it means
that his profit depends almost solely on
his ability to control costs. Sometimes the
project is sold before it is finished, making
cost control even more critical.
The cash flow projection in this example
is a model for project development fore-
casting, and I recommend that you use it
for your project.
John Reynolds plans to fix up a house
that has inadequate plumbing and electri-
cal work. In addition, the house has been
unoccupied for several years and most of
the windows are broken and the floors are
in sad shape.
He plans to invest $5,000, paying
himself a salary of $1, 500 per month for
three months while the house is being
refurbished. When complete, he’ll sell it for
an immediate cash profit of $12,445 plus
a note from the buyer for an additional
$12,000.
Extensive documentation is required
because John will need to borrow money
from a bank to complete the work. With
private financing it’s possible to complete a
development project with less data.
Obviously, a developer working on more
than one project may have an ongoing
business independent of any particular
development.
Regardless of project specifics, the
developer must establish his ownership
of the property or concept, back up his
assumption about its projected selling
price and the terms of sale, and verify
his estimates of the costs necessary to
complete the project.
Copies of many of the documents
referred to in this example have not been
included because they are all imaginary.
Of course, for a real project, all relevant
documents should be included. In this
instance, John Reynolds would surely
include copies of the preliminary title
report, showing him as property owner;
copies of a title insurance policy, showing
that the title is good; a copy of the note
in favor of the Joneses, showing that the
balance due them is really $55,000; and
copies of all bids from the subcontractors
who will do the work. In addition, the
bank will surely require that a written
appraisal of the property be included. If the
bank has experience with John Reynolds
on other house rebuilding projects in
the particular area, they may accept his
judgment as to the amount of work needed
to put the house in a condition to justify
the projected selling price. If not, he may
have to provide a written report from the
city inspector’s office, stating what work
must be done to get an occupancy permit.CD-ROM
The text of this Business Plan for
a Project Development is included on the
CD-ROM at the back of this book.