Real estate development risks and there control is the number one priority of professional developers or maybe they never get to do another development. I am continually amazed to find after six years of teaching developers that the first thing most do is buy some land with some of their own cash and borrowing the majority from the bank.To new developers getting control of the land seems logical and yet is the last thing a professional does. So beginning a real estate development by doing the complete opposite to what you should do is putting yourself behind the eight ball from day one and send the ‘risk’ indicator rising.From a development point of view land is only worth what you can do with it and that is determined by the Town Plan of your City or Town and the particular zone that applied to the land you are considering.For example, if you were to buy land that is zoned Rural and you wanted to develop some townhouses or residential houses, you would not be able to do so.If you bought some industrial land and your idea was to develop some shopping on it you would not be allowed to do so by the Town Plan. Professional developers learn the Town Plan, as well as all the regulations that control development activities in certain zones that are of interest to them.I mentioned another real estate development risk in the second paragraph that is overlooked in a most cases and that concerns the type of finance selected by a new developer when incorrectly he/she buys land as part of their first action.In one way it is easily understood because the only kind of loan the average person knows about is a mortgage over 25 or 30 years. But a mortgage is the absolutely wrong type of loan to take out when you are a developer.Why is that? Well, mortgages have to be paid back every month and that means cash coming out of your pocket every month. That is not what developers’ need or only the very wealthy would be able to develop anything.Developers don’t pay the lender of development finance every month out of their cash flow (pocket). The amount of interest is calculated on a monthly basis on the amount a developer draws down from the lender. That interest is then added to the pay back amount required at the end of the development.The next reason mortgages are the incorrect finance tool is the length of a development project can be anything from say, one year to maybe three years and then we pay all the development borrowings back to the Lender.So as mortgages on property last for a longer period of time, they are clearly not the correct product for a short term developer.So by not being educated in real estate development a new developer is committing to land without knowing “exactly” what can be developed on it and then buys it with the wrong finance package.So as I said earlier, putting yourself behind the eight ball ‘twice’ at the very beginning of a development is a rotten way to begin your development life.A few more items of real estate development risks to consider are market knowledge and the lack of a development system blueprint.Looking at market knowledge many new developers don’t appreciate that they are really a ‘manufacturer.” For example, when you buy any product in a shop it must have many features for it to be bought and successful.It must be priced right for its target audience; it must be great value; it must do the job it is supposed to; it has to be designed; it has to be researched before it is designed and many other sub items that make up the profile of any product.A real estate development product, irrespective of whether it is residential, commercial or an industrial product has to go through the same process.Because as I teach my development students … you are a manufacturer of a real estate product that the market must “love” in order for you to make a profit, develop a reputation and build a business.It is for this reason that the single most important thing you can do in preparing for a career as a developer is to study the entire process from another professional who has been down the track on which you wish to trod.The last example of the kind of real estate development risks to consider is entering into the development business without a development system.Let me refer back to the beginning of this article and the buying of land that may be incorrectly zoned and buy it with the wrong finance. Let’s say that has happened.Can I tell you that from that day forward … that is every day … the question asked is …”What Do I Do Next?”By not knowing what to do next you are adding ‘Time’ to your development project and Time is costing you mortgage money that you incorrectly have to pay every month out of your disappearing capital.Can you see how bad it can get by not be educated in the business and having a development system or as I call it a Development Road Map. No more asking … “what do I do next?”
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.