Inside a developer’s mind - Troika

Posted by | October 08, 2013 | News | No Comments
Kelowna Condo

By MARK HOLLAND

Special to the Okanagan Saturday

 

Have you ever wondered what goes through a developer’s mind as she thinks about what she wants to build? What was going through the mind of the person who built the place you live in now? How about where you work? Have you ever considered doing a development project yourself? What would you build?

Let’s just say that you want to go and develop a piece of land. Here is a quick tour of what you’re in for if you want to create a winning development project.

The chicken and the egg question at the start of every development project is actually not just one chicken or egg, it’s many. You may have a great idea, but if you don’t have the right place or land for that idea, it’s not a winner. You might have the right idea and the right piece of land, but if the community and local government can’t be persuaded to support it, it’s is not a winner. You might have the idea, the land and political support, but if no one lend you money to cover the constructions costs, it’s not a winner. And so on – through a long list of “must haves” to have a winning project.

And thus, the merry go round of project development starts. So where do you start?

As with most aspects of a successful business in a capitalist economy, let’s start with the market. Who wants to buy what? Price will always be a critical issue, but there are various way to make your project inexpensive or expensive – the key issue is – did you ring the emotional “I want that” bell for a home buyer? Do they want to live in what you want to build so much that they will pay your asking price and choose yours over all the other homes they could choose? Understanding your market and seeing the world through their eyes is the most important place to start. And there are many potential types of buyers: high or low income; single or families; people who aspire to be “gentry,” farmers or urban hipsters; sophisticated or rough and ready; alternative or conventional, and the list goes on. When you start your development project, you need to be very clear on the characteristics of your into what we call the PLU trap – meaning you accidentally design for “people like us” – e.g.: yourself.

The next thing to ask is where does my market want to live and can I get land there for a price they can afford? Usually unless you’re selling only to the very wealthy, the answer is no. So the search begins for a piece of land you can build something on that your market will accept. The search for land is time consuming – and the best pieces come through word of mouth and your network, although real estate agents and brokers can play a critical role here. So when you find the piece of land you think you want, and you get excited – one piece of advice – you have to stop. Stop. Stop and do the numbers.

Before you buy the land, you need to be sure that you will be able to build and sell your project on that piece of land with enough profit left over that a bank or financial institution will lend you the money required to complete planning, approvals, design, construction and successful marketing of the project. Unless the return on investment is high enough, a bank won’t take the risk of lending you money – nor will anyone else who charges less that 10% interest. So you sit down and develop a model of the projected costs (it’s a long list) against what you think you’ll make when you sell it. Then take your list of costs and add 25% contingency, and then see how much profit is left. This way take multiple attempts to adjust what you think you need to build that your target market will want, at a cost you can afford and at a price that they will pay. If you can work all that out, and you once again fell really ready to buy the land…Stop! Don’t buy the land yet.

The next thing you need to do is visit City Hall and discuss your idea with a member of the planning department. If she thinks it will fit with the existing plans for the area and/or the community would support your project even if changes are require to the plan, then you might have a project – but you’d be wise to have some more discussions to be sure you understand the path you have ahead in getting your project approved.

Finally, if you fell confident about what project in the eyes of your market, that you can get the money to do, and that the community will approve your proposed plans, then you can take the leap and buy the land. However, if you are not rich enough to buy the land with money from your savings account, remember that you will start paying interest and insurance costs on the land immediately – and it is going to take probably several years to finish your project – and that is going to be expensive.

The next step is to get someone to lend you the money to build this idea you have created. The people who may lend you money do not know what great person you are, how great your ideas are, how much experience you have and how hard you work. You can “tell” them all of this, but in reality, you’ll have to “show” it in how you deal with them. So, put on your best suit, create a very attractive document about your project with lots of numbers in spreadsheets, and start going from bank to bank to credit union to private mortgage company to wealthy people who may you know. If your suit I nice enough, your smile big enough and your enough and your numbers impressive enough, someone may smile, shake your hand, and you to their lawyer and you’ll sign on the line… and suddenly you owe someone a lot of money.

And then you can start the process of finding and hiring good consultants – architects, landscape architects, engineers, contractors, sub trades, marketing people and more. This group will help you design your project and get it approved with the City Hall and the community. After twice as much time as budgeted for and a list of delays and problems that would fill up a book, if you finally get to the finish line, you can put the for sale signs on what you built and stand back and congratulate yourself. You can then drive down the street on your way home at the end of this long journey – and notice all the other For Sale signs on all the other lawns.

But there is nothing quite like having overcome mountains of risk and problems to create something that you are proud of that was financially successful. And that is why we are developers.