So You Want To Be A Developer? Part 2
Wednesday, February 13
Developing real estate is not for the faint of heart. By the time you see a building going up, much of the work has already been done. Each project is unique and presents different issues. This is NOT a "how to guide", but an overview of some of the things we deal with in bringing a project together, be it a house, office building, multi-unit complex, PUD, or office park. The complexity may change, but each involves the basics.
Being a small family owned business, and funding projects on a case by case basis, our strategy is probably much different than a larger development firm, with deep pockets, that can hire out most of the job. Our upfront work and planning is done for the most part "in house". No matter what you are doing in real estate and construction,
#the 1 rule is know your market, and competition.
For the sake of this blog, I will use an example of a vacant parcel of land on which to build a commercial investment project, as that is our niche.
OK, we've found the land, now what?
- Market Research - Learn everything you can about the market you need to sell or lease your property to. What is the demographic?
- What is the neighborhood like? Does it suit your plans for the property?
- What is your competition? Size, style, values, etc.
I mentioned that we do most of the due diligence ourselves. Here's a partial list of what we might look for:
- Zoning - Double check zoning, uses allowed, and any issues that affect the property (traffic impact studies, soils testing, sewer studies, etc.)
- CC&R's - Are there any BOA, HOA, Covenants Conditions & Restrictions? What are they?
- Utilities - Where are the nearest utilities lines? Are there any hindrances to hooking up to utilities? What are costs involved in extending if necessary?
- Environmental Issues - Does the property have any environmental concerns? Are there any wet areas, streams, etc.?
- Ingress and Egress - How will you get into and out of property? Are any easements necessary?
- Curb, Gutter & Sidewalk - Are they in? If not, what is required, and what will the cost be to install?
- Setbacks - What are the setbacks required
- Landscaping - What is required in the way of landscaping
- Sprinklers - Will sprinklers or any other items regarding health and safety be required? What are costs?
At this point each developer's strategy may vary, and it will depend on the market conditions, developer, etc. If the market is HOT, and there's possibility of someone else buying the property, we would make an offer upfront, givng ourselves time for the due diligence. On the other hand, if there's not anyone else in the game, we like to do as much investigation as we can beforehand, and know what we are dealing with. The more you know the better your bargaining position.
We are currently considering a parcel on which we would be building a spec office building. The location is ideal. The listing price includes plans. However; in talking with the City, it could take up to 9 months to get the rezoning of the adjoining parcels that the original developer had planned for parking. Therefore; we are considering a smaller building, which would accommodate the parking on the one lot, and not require rezoning. In addition, the City doesn't like parking to be visible, meaning screening that will mimic the building. In order to get the number of spaces, we need as much buildable land as possible, which will require a retaining wall at the back of the property to retain dirt on a hillside the lot backs to. In order to know how high the wall has to be we need soils testing.
When we do a project we have an idea of what size the building should be, what the area will bring in rents, etc. Once we know all the hidden costs, along with the costs that are standard, we can evaluate all the components together and then make a decision on if it's a viable project, what the land value actually is, and what will the building generate for income upon completion?
Below I will outline our basic formula, it's what we try to balance out in each project that is being developed as a spec building, with the intention of marketing to investors buying to hold the property, or business owners wanting to own their own space. Both mean, good design, high quality, high demand area, and has flexibility in design.
- * Purchase the property for a price that works with the development costs,
- will bring market prices, and appraise out upon completion.
- * Design needs to have a modern yet timeless design, which will appeal to
- investors, business owners, and potential tenants.
- * Design must be cost effective to build, but offer all the amenities expected in
- the price point.
- * Double check on all healthy and safety code requirements for the planned use
- * In most instances we design projects as condos, which allows more flexiblity
- in sales and financing for future owners.
NEXT UP: Making the offer, and the Design Process. In coming blogs I will address obtaining bids, financing, applying for permits, marketing, etc.
I hope this has given you a better perspective as to what goes in to bringing a project together. Each job is unique, as is the the skill level required. I would say that if you want to venture out of your comfort zone, find someone that has the experience, and preferrably is licensed to work with you and show you the ropes.
Always check references, bonds and insurance.
If you have any questions, please ask. Your comments are always appreciated.