How they did it: turning a reno disaster into a success

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No one who undertakes a renovation job expects the project to be a problem free affair. Budgets can get blown out, schedules can overrun and getting planning permission can be a herculean task.

It’s fair to say however that the road to success for Queensland investor Kerrie Mercel was rockier than even the most seasoned property developer could have imagined.

A massive fallout between two of her tradies, the bankruptcy of one of her joint venture partners and a vast unexpected bill from the council were just a few of the speed bumps that Kerrie had to negotiate. But by calmly tackling one problem at a time, she ultimately managed to bring this troublesome renovation project to a fruitful conclusion.

The first hurdle

The property in question was a commercial multi-occupancy dwelling designed  to cater for people in need of institutionalized housing. The property’s manager had decided to walk away – taking his clients with him and leaving the building’s owners in a real fix.

“It was a crying shame. The property had 12 independent bedrooms and a big communal area and kitchen, but the manager had taken all of their clients and set up shop down the road. So that left the property uninhabited and they couldn’t find another manager who would pick it up,” explains Kerrie.

It was a potentially very profitable site ripe for developing into a six unit complex but despite a lot of interest being shown in the property there was one problem that turned all would-be buyers away.

A town planner had advised previous interested parties that to be developed into six units the property would require 12 parking spaces and that their simply wasn’t enough room for them. Overcoming this just took a bit of creative thinking from Kerrie’s business partner Amanda, who just happened to be a landscape architect. She submitted a proposal to council suggesting that eight spaces would be ample and that the shopping centre’s car park across the road could cover any occasional over flow. The council were then happy to approve an application with only eight parking spaces.

The project begins….and the troubles continue
Kerrie had paid the owners of the building $1,000 for the option to renovate and sell the property, and had agreed to pay them $720,000 once the renovation was complete and the new flats were sold. Whatever remained after renovation costs would be hers and Amanda’s to keep.

“We started work on the property just before Christmas 2009 and had about half a dozen trials and tribulations,” she says.

First up, one of the members of the company that owned the property went bankrupt, which caused a major headache with the receivers.

“They wouldn’t allow the existing manager to manage the property unless he paid them the excess of $10,000. So the existing manager couldn’t sign off on anything and that stopped work for quite a period of time,” says Kerrie.”

After a period of negotiation the problem was resolved but a knock-on effect of the delay was that Kerrie ended up having to bring in several tradesmen at once to get the schedule back on track, but this tight scheduling created its own problems.

“The tradies like to have the whole area to themselves,” says Kerrie. “So we had a lot of issues there. The builder and the plasterer ended up having a massive fight, and the builder ended up walking off the job.”

But by calmly dealing with each problem as it arose, Kerrie managed the job to completion and finished up with her six units. It was a rather unusual renovation, she explains, with the team actually doing more demolition than building.

“Unlike most renovations where they put walls up, we cut holes in walls. So that’s where we cut a lot of costs by using the existing plans to open spaces out,” explains Kerrie.

More dramas selling 

With the building up to scratch, all that remained was to get the council to sign off on the plans and allow them to put the property on the market. This however proved to be an unanticipated and untimely stumbling block.

“We paid the council fee and put it in, but hadn’t heard anything a month later. We called and they said they weren’t approving the plans because the company owning the property owed over $80,000 in rates arrears!” says Kerrie.

“We’d used all our investment money to develop the property and didn’t have an extra $80,000. So we went back to the manager, and asked the 14 or 15 investors to come up with around $5,000 each so that we could get the plans stamped, sell the property and give them their $720,000.

“He went to the investors, but couldn’t get a unanimous decision. They would rather have seen the whole lot sink that give us any more money. So we hit a stalemate yet again!”

Once again Kerrie was faced with a potential disaster that she was able to avert by staying calm and coming up with a creative solution.

“We’ve got venture partners in a property in Blackwater, and they very kindly offered to lend us the money in lieu of a quarter share of the Blackwater property,” explains Kerrie.

“We only needed it short term of course, so once the property was sold we could give them back their money, take back our quarter share and make the Blackwater property a 50-50 partnership again.”

The agreement here was that – as it was their bill that needed to be paid – the  property’s owners would pay back the $80,000-plus after the units were sold and they received their $720,000. This meant that neither Kerrie nor her Blackwater partners would end up out of pocket.

But, in keeping with the project’s history, as soon as one fire was put out another one flared up. Having paid the council its rates and secured approval to sell, all six units were snapped up by keen buyers. By this point however the GFC was in full swing and when the bank came in to value the properties, their valuations were so low that four of the buyers dropped out.

So Kerrie and Amanda were left with four units and – even after selling the other two for a total of $545,000– still had to pay the property’s owners another $260,000 to make up the agreed buy-out sum of $720,000.

The solution, they decided, was to keep hold of the four unsold units, borrow the $260,000 they still owed using those units as collateral, pay off the property’s owners and rent out the remaining flats as soon as possible.

This task proved to be easier said than done, with very few lenders being willing to accept the units as collateral and instead demanding a 20% deposit in cash – money that Kerrie and Amanda simply didn’t have.

Finally they found a lender who was willing to lend them the $260,000 on the units without a cash deposit. They took three of the four units as security, says Kerrie, “so they got an awful lot of equity for the lend.”

“We’d told the property’s owners that from a set date we’d pay interest on the money and also the rates water and insurance, so they weren’t out of pocket while we were messing around trying to refinance,” she adds.

“It was supposed to be a six-month project and it took 12 months because we had to stop in the middle. And then we had to stop at the end.”

Fast forward to the present day, and they’re currently renting out four of the units for between $275 and $295 per week and they hope to sell one more either outright or through a rent to buy scheme.

So have the hectic schedule, the trials and the tribulations put Kerrie off continuing with her renovation adventures? Absolutely not, she says:

“This project has set up our retirement and we’re currently looking for a similar project, as we love the challenge. We had the best builder, electrician, and plumber on the planet, who’ll be contracted to do our next job.”

Here’s hoping that her next project runs a little more smoothly than the last.

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