Real Estate Development: 5 Tips for Completing Your First Development Deal

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I am part of a family owned real estate development company. We are licensed in real estate and construction. In addition, our son in law is a licensed electrical contractor, and our son does our architectural designs and renderings. We’ve been in business for close to 30 years, and during that time, we have primarily focused on the niche of developing small commercial projects. Our projects have included office buildings, small office parks, office/retail condos, medical/dental buildings and clinics, along with residential subdivisions and multi-family.

Being licensed in real estate and construction gives us a good foundation for development. Aside from that, knowing the local market, economy, etc. helps tremendously. We lived in the same area for decades. We KNEW the local market, housing patterns, schools, etc. All of that helped us to recognize when, and where there was a void in the market, and we’d consider whether or not it was in our niche area, or the direction we were planning on going.

How many times have you noticed a vacant parcel of land and thought about what type of business, building, etc. would be good there? Developers do that too, and then take the next steps to bring that vision to fruition.

Of course, just because we can imagine it doesn’t mean it’s possible! Every community has their own zoning laws that dictate what can or cannot be done on properties in their jurisdiction. In addition, there is parking, landscaping, height, environmental, and other issues that must be considered for each project. Some of these can take considerable work and time to figure out; and that’s why it’s important to have the experience necessary to work through each item. Below is a partial list of the types of things you will need to check into. This is just to give you an idea, and not an exhaustive list!

  • GO in person to the local Planning and Building Departments. Find out what the parcel is zoned, and what that zoning allows. Most areas now have a General Plan overlay that covers zoning for the next 20 years. It shows what the use planners want both now, and in the future.
  • After you know if the property fits your intended use, you will need to figure out what exactly is it going to take to develop it. Where are the utilities? What will be required in the way of curb, gutter, sidewalk, landscaping, etc.? Are there any easements or other things, etc. that affect the lands development?
  • Find out what the fees are, Building permit, School fees, etc.
  • What is the process for getting a building permit (ask if there’s a flow chart)
  • For the use you want, what is the parking criteria? Uses like medical space have higher parking requirements, as do retail.

When it comes to developing a property, it’s an intricate balancing act. We must weigh the cost of the property, against the amount it will cost to develop it to its fullest and highest potential, and yet, do it in such a way that the finished project will be financially feasible.

If the property is a commercial parcel, the finished project, be it an office building, retail building, etc., must not only look good, but be able to command the rents or sales price to justify the cost of the investment to an end-user or buyer. That’s why it’s extremely important to know how to get the highest value from every dollar spent on development.

When we develop an office project, we are mindful of the tenants or business owners that will occupy the space, and the fact that they are working to earn a living. Our goal is to allow them to keep as much of their hard-earned dollars in their pockets as possible, while giving them a high quality, well placed building from which to do business, and of course, we have to make a profit on the project too.

We have the same philosophy for investors buying our projects. We know they want a well located, marketable property, one that will appreciate in value over the years, that is well-built, and planned with low maintenance in mind, to keep their ownership costs down. On the other hand, if money is no object, and you want the most extreme design, and highest finishes imaginable, that’s possible too.

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Designing the Project

Secret #1The art of dressing up a box. The simpler the building, the more cost-effective it is. Yet, everyone likes to be in a building that has style. The trick is designing a cost-effective building, which looks upscale, but is economical to build, with as little common area space as you can put, while giving a feeling of space. Put your money where it has the highest impact.

Secret #2Use a designer if an Architect isn’t mandated. However; only do so if YOU know what you are doing, and what is required. After you’ve found the land, know that it works for your intended project, etc., it’s time to get down to designing the project. For us, we are able to do the preliminary design, which includes the site plan layout, and preliminary plans “in house”. That not only saves us money, it allows us to brainstorm as the plan is being drawn up, and make changes immediately if we see something isn’t going to work, or could be designed more economically.

Once we have the preliminary plans and site plan done, along with the exterior elevations, etc., we then take them to our structural engineer, who will go over the plans and make sure the design actually works. Once he finishes his work, we send it over to a licensed architect that will make all the required notations, etc. on the plan. After that’s done, we are ready to submit to the Building Department for plan check. If all goes well, within a month or two we are ready to begin construction.

However; most people are not fortunate enough to have all of these services available in their business, and will need to hire people to fill in what’s missing (contractors, architect/designer, engineer, etc.)

MONEY! MONEY! MONEY!! MONEY!! …… MONEY!!

We’ve all heard the saying “money makes the world go around” and nowhere is that more true than in Commercial Real Estate. Since the banking crisis and real estate crash, finding funding for new development projects has been a challenge. Working with those challenges means that in order for smaller developers, like ourselves, to overcome the issues brought about by the collapse of the market, developers have to compensate by finding projects that make up for any other shortfalls.

Don’t get me wrong, even in the best of circumstances, independent builders, always have had to beat the bushes to find financing for “spec” commercial projects. At the same time, it helps us hone in on what “private lenders” and “hard money lenders” are looking for in a project, and to design our projects to that criteria, which gives us an even stronger project than we might have had before.

Secret #3 – Plan the project through a lender or investors eyes. It means rising to the challenge of designing projects that will appeal to end buyers and users, command top dollar rents, and yet do it in such a way that the costs involved are some of the most competitive possible. Simple, right?

For our purposes, because our projects are built on speculation, they are new construction, etc., we usually depend on PRIVATE MONEY LENDERS, or HARD MONEY LENDERS. Private money lenders are just that, individuals loaning their own money. Hard Money Lenders on the other hand are lenders that lend money on projects based on a higher risk. Risk is based on many factors, such as credit of the borrower, experience, type of project (new, remodel, etc.) location, the project, the economy, etc., and each lender has their own criteria and value system.  Higher risk deals usually mean higher interest and points. However; after you build up a relationship with a lender, and they feel good about your deals, they will usually charge less.

I hope I’ve given you a good overview of the business.  Every area has different regulations and processes. However; once you learn the area, and what is expected, if you build relationships with the people who work in the Planning and Building Departments, it becomes second nature.

Relationships Are Key

Secret #4 – Never underestimate the power of relationships. If there’s a secret to getting through planning easier, this is it. My husband is great at going in and talking to the planners and building officials BEFORE we submit any plans. He finds out what it is they have to say about the neighborhood we will be building in, what they want there, and any other information he can get. When we design our project, we keep their guidance in mind, and design something that will work with what they want. THAT is how you get projects through faster, and you don’t end up with the horror stories you so often hear.

In addition to the Planning and Building Departments, if you can find good sub contractors, that do good work, and are reliable, keep them! Too often people treat those in the trades as if they’re below them somehow. Learn to consider them as partners in your project. You want them to want to give your job priority, etc., and to want to come back and work for you again.

Marketing Your Project 

Secret #5Price your property right, and use a Broker.  When I used to work as an agent and someone would want to list their property far over what I knew it would sell for, I’d ask “Do you want to list your property or sell it?” Plenty of agents will or sellers will list a property way to high, and go fishing. However; once the property has been on the market a long time and becomes stale, then is reduced, everyone already has formed an opinion of the property. Wrong pricing is the leading reason properties don’t sell.

We are brokers, therefore, we list our own properties on MLS, etc. However; if you aren’t a broker or an agent, consider listing your property. If you are in an area where properties are just flying off the shelf, you may be able to sell your project. However; most of the time someone calling on an ad doesn’t buy the property they call on.  Agents get the people who are calling in on their ads, and if your property is listed, and fits the criteria of a buyer the agent is working with, they’ll show it. Agents work with buyers every day, and are well worth the commission. We’ve even listed our own property with another agent before, because they actively worked the market of luxury homes, and we didn’t.

Should you want to go it on your own, there are so many low-cost ways to market your properties. I think setting up a website specifically for a property is essential. It’s a very easy way to send potential buyers, tenants, investors, etc. to a place where they can look at pictures, view floor plans, see the location on a map, and get all types of information, many sites even incorporate a blog.

In addition, there are sites such as BiggerPockets, where you can market your properties free with membership. Other sites are free, such as Postlets, and so many others. Marketing is largely based on the type of property you are trying to sell or lease, and will need to be targeted to your demographic.

That about sums it up. I will say that it’s not always easy, but it is very satisfying knowing that the work you do will affect a neighborhood for years to come. I always like to think about what will happen in the property in the years ahead, and ponder what type of businesses will be in the buildings, the great family times that will be shared in the homes, and the kids that will be playing in the parks we’ve built.

So, next time you’re out driving around, and see a vacant lot, let your imagination run wild!

That’s the first step in Real Estate Development. Have fun, and prosper!

Do you have any questions or comments? Please leave your thoughts below!

Photo: Evren Ozbilen

About Author

Karen Margrave

Karen is a partner in a family owned real estate development company, in Orange County CA. The company specializes the building spec projects (SFR, MFR, Medical Office, and other types of properties), designed to meet the needs of both investors and owner/users. Licensed in both real estate and construction.

9 Comments

  1. Douglas Dowell on

    Outstanding read Karen,

    Thank you for breaking the process down into practical steps. Development is a very very appealing strategy to me. Your wisdom will serve as a springboard for my next step.

    Many thanks :))

  2. Karen, great article thanks so much for putting this together. 2 questions, #1, if you find a residential property you want to build on, how can you protect yourself if you get under agreement and then through the due diligence period you find out zoning wont permit you to build what you hoped to do? I know it’s not appealing to the seller if you have contingencies in your offer to purchase, but should we have a contingency? If so what kind of contingency, and if not then how could you find a way to get out if the zoning doesn’t work out? #2, is regarding bank financing, say for example you want to buy an existing property for $300,000 with the intent to knockdown and spend another $300,000 to rebuild, what would the bank require from you as the buyer? Would they require the 20-25% down payment on just the purchase price and then they give a construction loan for the $300,000 construction costs? Would the monthly payment be based only on the loan to buy the property and then would the construction loan with accumulated interest only begin once the project is completed?

  3. Kevin Perk

    Karen,

    As a former Planning Director, I will second all you have said.

    Everyone contemplating developing land needs to be aware that zoning and building permits can be a really complicated matter and can add a lot of costs and time to a project (Don’t get me started on the utilities.). GO ASK FIRST! The last thing you want or need is a stop work order. I can’t tell you how many times I heard “Well, my neighbor, buddy, etc. said I could do that.”

    Thanks for sharing Karen,

    Kevin

    • I totally agree. Most of the problems come up because people make assumptions on what can be done, or want to do something that Planning has already indicated they won’t allow. We always try to find out what they want first, and plan our projects with their wishes in mind. Makes life much easier. It’s always best to choose your battles wisely.

  4. Nick F., first off, you want to know what the property is currently zoned., and what the General Plan for the area shows for the property. Is the use that you want to do consistent with that? If it is going to require a rezone to build what you want, that is time consuming. You can put a contingency in the contract to allow you enough time to check with Planning etc., to see if your intended use will work on the parcel, and make your decision after that. There’s no guarantee Planning will allow the zoning change until you actually apply for it, pay the fees and get your change. I’d advise if you are new to development, you not start with a property that needs rezoned.

    As for financing every bank has their own criteria on how they deal with construction loans, what they want, etc. Talk to yours. We use HML’s on most of our deals as they are built on spec, and banks don’t finance spec building for the most part, especially commercial.

    You can send me an email should you have more questions. Good luck!

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