Real Estate Development Explained Easily

Many people familiar with the real estate market and industry are very familiar with the term “real estate developer,” and perhaps can even name a few famous ones, from Donald Trump to Alfred Taubman. It would seem that the term itself is very self-explanatory, as real estate developer simply develops or improves real estate.

In reality, the entire concept of realtor development is of course much more complicated than that. Unlike someone that purchase a home to fix it up and resell it, a large-scale or high-end real estate developer often deals in millions or even billions of dollars in investment.

It’s true that a developer may be an individual, but more likely will be a partnership or Limited Liability Company, or even a corporation.

There are two major categories of real estate development activity: land development and building development (also known as project development).

Land developers usually purchase land that is unimproved, meaning that it has yet to have utility connections, roads, any type of grading, and so on. Unimproved means just that, in every case.

Developers then step in and define the “covenants,” which are the context of any future builds and improvements on the land. They also gain “entitlements,” which are legal permissions or permits in order to go ahead with their development plans. Once these covenants and entitlements are in place, the land development can then begin, with earth grading and other land leveling, utility connections, and zoning. Roads are also planned, built, and paved, whether for large cities or just neighborhoods.

Once the land is properly developed, building developers may then step in.

These building developers then have buildings, whether offices, retail, or private homes, planned and built on the land.

Building developers and land developers obviously need to work very closely, as the building developers plans will need to be accommodated by the land developers. For example, the utilities brought in for office buildings are obviously different than those for private homes, as are roads, and everything else.

Some building developers also purchase existing buildings or properties for the purpose of upgrading, remodeling, razing and rebuilding, or otherwise improving whether for sale, or to keep as assets to produce cash flow via rents and other means.

Why develop real estate?

When you really think about it, you realize the great amount of work and obvious risk that is involved in real estate development. Additionally, homes or estates cost a lot of money to purchase and develop (sometimes called “hard costs”), and can sometimes be difficult to sell. Because of these high expenses and difficult sales, and because the return on investment often takes some time, this explains the risk in ownership and development.

So then why choose this as an occupation? One thing to remember is that most real estate development projects are financed with debt leverage, that is, with borrowed funds the proceeds of which are assumed to earn a greater rate of return than the cost of interest.

By using debt leverage rather than personal investment, this cuts the risk tremendously.

How do you actually get wealthy?

And of course for most, the real question is how one actually gets wealthy from home developments if the work is so hard and the risk is so high.

The answer is of course complicated, and certainly there is nothing guaranteed. Many developers have lost as much as they have gained, and the market fluctuates greatly. However, it seems that those who are smart about their investments and developments are the ones that are successful. After all, the entire point of real estate development is much like stock trading – you want to sell the product for more than you paid for it.

Having a true understanding of what makes real estate valuable is key. Make a good decision as to location, upgrades, and the like, and you’re sure to make money. Make bad decisions, and you’ll lose money.

To actually get wealthly then, it pays to do your homework as they say. Purchasing land or buildings on the low end is good, but just because something is affordable doesn’t mean it’s going to turn a profit once it’s developed. There may be a reason why certain areas are undeveloped or certain buildings are up for sale.

Quite often, when people begin to invest in commercial real estate, they begin small. They may acquire a single family dwelling, a duplex or maybe even a small apartment building. In order to keep continue the commercial investment game; you have to keep moving property. In fact, if you do not grow, you will eventually find that your bank can no longer help you because you have maxed out your investment portfolio. Taking too long to develop can be a death sentence in the game.

Additionally, staying on top of trends in the real estate market is also crucial. Population shifts can greatly affect the outcome of a development project. When the populace is moving out, it makes no sense to develop new property or refurbish old ones – who will buy the property is everyone is moving away? And, who will buy your developed land if all builders are unable to sell their current properties and are looking at other areas? Sun Tzu, author of “The Art of War,” said, “By taking into account the unfavorable factors, he [the soldier] may avoid possible disasters.” This point can obviously apply to real estate development and eventual sales. Being wise about potential problems with any one area or development deal can help avert monetary disaster.

To actually get wealthy from real estate development, it takes some skill and effort to stay ahead of the game, and the ability to organize all the steps needed, as well as to delay profits. However, with a bit of work and study, it can pay off. Development has long proven to be one of the most profitable areas of business that’s around – if you have the patience to play the game right.

Uncommon View – Commercial Real Estate Development

This is a story I heard growing up:
When my grandfather was 10 years old he found a penny. With that penny he bought a pencil. He sharpened that pencil then sold it for two cents. He took that two cents and bought two more pencils, sharpened them and sold them for four cents. He reinvested his four cents in four more pencils, sharpened them and sold them for eight cents. Then, again, he bought eight more pencils, sharpened them and sold them for sixteen cents. This went on until my grandfather had amassed $10.24. That’s when my great Aunt Sophie died and left us her portfolio of shopping centers, office buildings and rental homes. Our family has been in the real estate business ever since.

The story isn’t true, but it taught four valuable lessons:

1) Sweat equity is a powerful tool;

2) If you reinvest your earnings, wealth can grow geometrically;

3) The BIG money is in real estate; and

4) It would be nice to have a rich Aunt Sophie.

Like most families, we didn’t have a rich Aunt Sophie, so my parents focused on lessons 1, 2 and 3. I mention this story as a backdrop. My life growing up was always about real estate.

In my article “Keys to Closing Commercial Real Estate Transactions”, I mentioned my father because he was, and is, a wiz when it comes to commercial real estate. It was through him that I came to represent commercial real estate developers.

What I didn’t mention was that my mother was active in the family real estate business as well. While my father focused on commercial land development, my mother focused on residential real estate. I should have known better than to mention one but not the other. This article could be sub-titled “Keys To Maintaining Harmony”.

What does maintaining harmony have to do with commercial real estate development? Stick with me on this, then decide.

My mother cared about “quality of life” issues. Comfortable homes. Neighborhood parks. Safe streets. Good schools. Museums and other cultural enhancements.

I remember watching my mother lay out walking paths around detention ponds in residential developments and looking through catalogs evaluating park benches and playground equipment for neighborhood parks. As a residential real estate investor, developer and broker, my mother focused on “living environments”. If families were going to live in her neighborhoods then the neighborhoods had to be “family friendly”.

As you might imagine, with my father focused on commercial development and my mother focused on residential quality of life issues, conversations around the dinner table were always interesting, and sometimes dicey.

On one side of the table, my father envisioned expansive commercial development for retail shopping centers, office buildings, restaurants, hotels, theaters, warehouse superstores, entertainment centers, nightclubs and more.

On the other side was my mother insisting upon neighborhoods with comfortable homes, safe streets, parks and other open areas, dry basements, clean air, clean water, and minimal noise and light pollution.

According to conventional wisdom – derived from public zoning board and plan commission hearings and community planning group meetings when commercial development is proposed near existing homes and neighborhoods – one might expect a clash of ideas turning into heated challenges and demands to forego development. Fortunately, our dinner table was nothing like most public hearings.

My mother and father each respected the vision of the other and understood the natural symbiotic relationship between residential and commercial development. Instead of complaining that one was trying to destroy the vision of the other, they anticipated each other’s legitimate development and environmental needs and sought reasonable accommodation when possible. Sometimes they couldn’t agree, but there was always a meaningful attempt to understand the viewpoint of the other, exchange ideas and come to a mutually respectful and workable plan.

My mother was a resourceful advocate. She made my father think about how commercial development would impact residential neighbors and plan ways to mitigate adverse consequences on families. Long before coming into their current vogue, I learned at our family dinner table the concept of “lifestyle commercial centers” and complementary residential/commercial mixed use developments.

The point for commercial developers and residential advocates is that they should each turn down the volume of their development debate and respectfully listen to what the other is saying. When the other has presented legitimate concerns or needs, those concerns and needs should be reasonably accommodated where possible. An idealistic dream? Perhaps. But I grew up watching it work.

To be sure, not all expressed concerns are legitimate and not all proposed accommodations are possible. In those cases, resolution must necessarily be left up to public plan commissions, zoning boards, and municipal trustees or aldermen to arbitrate and decide the debate. As guardians of the public welfare entrusted with promoting the best interests of the community at large, they must decide. In a fair and evenhanded political environment, your best bet for prevailing is to demonstrate that you have listened with respect and have made reasonable and conscientious efforts to promote public harmony rather than discord.

POINT: If you are a commercial real estate developer proposing a commercial development near existing residential neighborhoods, don’t pretend they don’t exist. Think about how they will be impacted and include in your development plan ways to mitigate any adverse consequences created by your development. Talk to your residential neighbors. Listen to what they have to say. They are not ALL crazy. Sometimes (often, actually) they have legitimate concerns about real problems. If you can include in your development plan a way to economically fix a problem they already have (such as flooding, blight, inadequate parking, lack of sufficient parks or playgrounds, poor traffic circulation, etc.), your chances of favorable governmental action to approve your development plan goes up.

Whether you are a commercial real estate developer or a neighborhood advocate, understand that, whether you like it or not, conditions change. Nothing stays the same. Obsolescence and blight are natural products of time. Redevelopment is coming. If not today, then someday.

Which brings me back to my point of promoting family harmony by making amends to my mother. You don’t necessarily have to read what follows. This is primarily for her.

My mother retired last year but says she still enjoys reading my newsletters and articles. Perhaps a mother’s love, but she always likes to read what I write about real estate and real estate development. She says her favorite is a poem I wrote about “real estate development” called The Great Pyramids Of Egypt Are In Disrepair. She thinks I should share it.

The poem was written in 1992. I have to admit, it never occurred to me that the poem was about “real estate development”. I can assure you, I was not consciously thinking about real estate development at the time I wrote it.

But my mother is a smart woman and I have learned my lesson. I am not going to lightly cross her again. So, in the interest of family harmony, here it is. I leave it to you to decide if it is about real estate development. If you don’t think so, please don’t tell my mother.

THE GREAT PYRAMIDS OF EGYPT ARE IN DISREPAIR

We looked deep into each other’s eyes and said:
“Our Love will last forever”.

When I was two my parents built a new house
next door to the one we rented from my grandfather.
It was “ultra modern” with all the latest conveniences
A garbage disposer – dishwasher – central air -
central vac – wall-to-wall carpet – a private den -
We had a bird bath – and two hundred newly planted Scottish pines.

It’s a parking lot now -
The church next door needed it.
Business was good.

The church doors were padlocked last year.
God moved down the street to nicer quarters.

I saw a news clip recently.
The Great Pyramids of Egypt are in disrepair.
They may not last unless work starts soon.
Sometimes the damage can be too great.
Even mummies get so wrapped up in what
they are doing they can begin to unravel.

Yesterday a friend asked: “Whatever happened to that girl?”

The POINT (according to my mother):

Change happens.
What seems new and permanent today
Will be gone tomorrow.

No time stands still.
Real Estate projects are no exception.
Redevelopment is coming.

Real Estate Development – When is the Right Time to Get Started in Property Development?

The media is currently full of real estate ‘doom and gloom’ – real estate repossessions and arrears are up and real estate prices are down … its almost as if the ‘sky is about to fall’! This situation has seen many real estate developers, and property investors generally, leave the market – and for those thinking of starting out in real estate development, these are scary times indeed.

What seems like the worst time to get into real estate development can, in reality, be the best time. Successful real estate developers today realize that they can use time to their advantage – their real estate development projects will typically not be ready for sale or rent for 2 to 4 years from inception. So if they have bought well, they are less likely to be affected by the economic situation at the time of purchasing their real estate development site.

In fact, a weak market is a real estate developer’s paradise, because a weak market is a buyer’s market, and one of the first steps to any real estate development project is securing a viable real estate development site on the best possible terms.

Although we know that the real estate development business is cyclical, and many parts of the world are in a property downturn, we also know from history that knowledgeable real estate developers are successful in any market – falling, flat or rising.

We’re working towards what we believe the economic conditions will be in 12 to 36 months time. Indeed we ourselves are still active in the market – seeking Council permission for a number of real estate development projects. This gives us the opportunity to act quickly and build our approved real estate development projects when the market does become buoyant.

It is our opinion that the following market signals are some of the key factors that will lead to increased future opportunities, especially for real estate developers:

· The pent up demand for housing. In March 2008 leading Australian economics forecaster, BIS Shrapnel chief economist Dr Frank Gelber argued that housing prices across Australia will rise by 30% to 40% over the next five years because of the built-up shortages of housing.

· The current Federal Government has stated that they will work towards increasing Housing Affordability and have begun to announce incentives including Tax Credits of $6000 per year if the housing is rented at 20% below market rent.

· We believe that an increasing number of people, in the short to medium term, are likely to require the rental accommodation that we intend to build. This is due to either their financial stress (can’t afford to purchase a home) and/or demographic trends (including Gen-Ys who are less likely to buy Real Estate).

Even if our ‘crystal ball’ is incorrect, we know we have the resources to hold real estate development sites during possible further market fluctuations to come, and increasing rents are certainly helping with that!

Our belief is that this is a golden time to act – perhaps a once in a generation opportunity. Maybe it is not the time to sell completed real estate development projects at the moment, but it is certainly a great opportunity to secure the development site and obtain development planning approval. Now this strategy is not for everyone – you must have the necessary resources to hold the development site and especially the knowledge of real estate development to take advantage of these opportunities.

The best approach for anyone contemplating real estate development will depend on his or her own personal and financial circumstances, but the key message here is that you must do something!

There are many strategies that small real estate developers are currently using, if they don’t have the resources to complete a real estate development project right now, including to turn their real estate knowledge into cash by locating ideal property development sites, perhaps taking out an option on the site, and on-selling the ‘Development Permit Approval’ to someone who does have the resources.

Successful real estate developers know that times of opportunity like this only come along once in a while, and they’re taking action so they don’t miss the boat.

Regardless of your immediate financial situation, this is the perfect time to leverage your real estate development knowledge into current or future income. If you have any doubts about your ability to do this, or you would like an experienced real estate development mentor to guide you, act now to get the knowledge and mentoring that you need. There is no time to waste!