Real Estate Development Tips, Risks and Pitfalls

I would like to note down a bunch of RE dev feedback I got from Cherin. I am really betting on this project to work out so I can at least make about 4–10 years worth of my salary in one go… I am fed up with getting beaten down by corporates and other selfish people who don’t want to get work done, are toxic, and will abandon you. If you have any thoughts, please comment back, would love to hear your experiences!

By the way, this looks like a great course that covers a lot of basics: https://www.coursera.org/lecture/construction-finance/introduction-to-financing-development-projects-6qGaF

Was on the phone with veteran Cherin the other day to cover the risks and pitfalls of development…randomly jotting down points here for the record. To set an example let’s say the land cost is 1.2m, and construction costs are 6.58m.

- Get a feasibility study (it is not just a cost breakdown)

- Consultant cost is about 5–7% of the total construction costs (TCC) (460k max)

- Architect cost is no more than 5% of the TCC (329k max)

- Land cost is no higher than 30% of TCC (1.97m max)

- Soft costs should be about 7% of TCC (460k max)

- For revenue make sure you take into account the commissions and selling costs.

- Find out from other Quantitative Surveyors (QS) what the ballpark costs are

- Talk to other RA agents to understand the numbers and sales (luckily, brother knows the numbers very well)

- For bank construction loans, usually, at least for Australia, they give you 60% (4m) only and you need to cough up the 40% (2m)

- Most banks demand a monthly QS status report, to make sure your project is on track. Especially if they don’t give you a lump sum, and only give you loans with regards to the completion of your status. Otherwise, they use the report to judge whether they should call your loan

- Process and procedures must be very well defined

- Prevent overrun. Ensure costs do not further increase

- Clarify terms for capital injection if needed when costs do overrun. What would be the action steps?

- Avoid chances of allowing other parties to reduce your shares in a JV setup if you don’t have extra capital for extra injection

- Define minimum requirements for management fees. Underperformance: what if agent cannot reach target, they should not be entitled to receive their fees.

- Define the forms of communication, how often and in what format, from the teams. How to manage costs? Who will deal with permits?

- For Cherin, the hardest part isn’t construction, it was the permits and pre-sales.

- She said it isn’t rocket science. Once you get a hold of it, it is fairly straight forward. Just make sure everything is in order.

- Decide what role you want to take. Hands on or off? Hands on you will be PM-ing the whole thing, from details like design to sales. Hands off then you’re a silent partner monitoring only the risks.

- Other comments I got from people is that retail is always the last space to be rented out. According to Cherin, brick and mortar is dead. So it’s probably best to avoid dealing with commercial retail space.

- Most of the time, space that does well commercially does not do well residentially, and vice versa. Because people don’t usually want to live in heavy foot traffic, noisy places. However an exception maybe big cities and you can imagine areas like Lower East Side…

-Globally, all RE laws are city based…different cities will have different requirements such as % of pre-sales before commencing construction, cap on foreign ownership for sales units, number of units that need to be reserved for low income housing (priced below the market)

Additional feedback from my wonderful engineer friend Chris on October 5th:

• Check the utilities capacity of your area, such as transformers, sewage, etc. Say they’re at 90% capacity then you maybe in trouble getting supply hooked up to your units, and additional costs will be incurred to fix that.
• Building codes around the world are very vague. On paper they will claim “best practices” but you don’t know if best means most energy efficient, the hottest, the lightest, the brightest? There is no clear definition. And it all depends on the folks who approve your permits to make the call.
• It can all be about relationships when it boils down to getting things done. The closeness of the government building council (or whatever you call them) and developers is helpful.
• Always try to get architects to give professional designs and feedback as they are most familiar with local codes and limits. You want someone who will maximize the designs for you, they don’t necessarily think out of the box and your dev and them may just be templating. e.g. what are the maximum Gross Floor Area you can build? Thickness of walls? Distance between units (fire hazard), etc
• Selling vs. renting out units. Renting can provide a cash flow while selling will just be one-off. These are different revenue models to think about… You can quickly cash-in and roll on to bigger projects, or you keep your property and bet on the building value to go up while you collect rent…