Developers, Do Your Homework!
It's probably been a long time since you've been told to do your homework, but never has it been more important.
A few years ago a developer could practically walk into a local bank with a contractor's cost estimate written on a napkin and get 100% funding for their spec home or commercial project. Now, with the economy in shambles and lenders falling off the map by the dozens it's time to go back to the basics.
Sales and construction volume have dropped drastically in the last year and lenders are reserving their funds for those projects in the best areas, and for developers who have done the most research, and have the best loan requests. Those developers make sure to analyze their developments at each and every step of the process, especially during the feasibility stages, when one makes a go/no-go decision.
If you’re going to spend a year, or several years, working on a development project you want to make sure there will be a great pay off in the end. If the project is ill conceived from the start no loan product will save you from eventual disaster, and possible financial ruin. How can you increase your chances of success? Do your homework.
When we consult with developers the first thing we do is go back to the land. We try to understand why a developer wants to build in a particular area, and what they plan to get out of the project when it's complete. It's important to research the area demographics of your potential development to understand the local trends. Who's moving in, who's moving out, and why are they buying what they're buying. Is the area comprised of young families who need three bedrooms and homes with at least 1,500 sf, or are there more single seniors who want smaller, single story homes, with handicap accessible features?
Asking yourself these simple questions will helps you conceptualize the type of product you will build and what amenities you'll need to include in the project. Doing so will ensure your project fits well in the neighborhood and will be neither under nor over built. It also helps you draft your first run construction cost estimate, which in turn helps you determine your potential profit margins.
Surprisingly, these simple steps are often overlooked by many developers, thinking that if a nice neighborhood supported a certain level of sales in the past then it must support that same level in the future. I can't stress how dangerous that thinking can be. That is the type of gamble that has so many would-be developers facing foreclosure on their projects. Don't be that person. Only a thorough review of demographics can help you understand what buyers are likely to do in the future. No one can predict the sharp market changes that can happen at any time, but by doing your research you can make a fairly good educated guess at future trends. Do your homework.
A few years ago a developer could practically walk into a local bank with a contractor's cost estimate written on a napkin and get 100% funding for their spec home or commercial project. Now, with the economy in shambles and lenders falling off the map by the dozens it's time to go back to the basics.
Sales and construction volume have dropped drastically in the last year and lenders are reserving their funds for those projects in the best areas, and for developers who have done the most research, and have the best loan requests. Those developers make sure to analyze their developments at each and every step of the process, especially during the feasibility stages, when one makes a go/no-go decision.
If you’re going to spend a year, or several years, working on a development project you want to make sure there will be a great pay off in the end. If the project is ill conceived from the start no loan product will save you from eventual disaster, and possible financial ruin. How can you increase your chances of success? Do your homework.
When we consult with developers the first thing we do is go back to the land. We try to understand why a developer wants to build in a particular area, and what they plan to get out of the project when it's complete. It's important to research the area demographics of your potential development to understand the local trends. Who's moving in, who's moving out, and why are they buying what they're buying. Is the area comprised of young families who need three bedrooms and homes with at least 1,500 sf, or are there more single seniors who want smaller, single story homes, with handicap accessible features?
Asking yourself these simple questions will helps you conceptualize the type of product you will build and what amenities you'll need to include in the project. Doing so will ensure your project fits well in the neighborhood and will be neither under nor over built. It also helps you draft your first run construction cost estimate, which in turn helps you determine your potential profit margins.
Surprisingly, these simple steps are often overlooked by many developers, thinking that if a nice neighborhood supported a certain level of sales in the past then it must support that same level in the future. I can't stress how dangerous that thinking can be. That is the type of gamble that has so many would-be developers facing foreclosure on their projects. Don't be that person. Only a thorough review of demographics can help you understand what buyers are likely to do in the future. No one can predict the sharp market changes that can happen at any time, but by doing your research you can make a fairly good educated guess at future trends. Do your homework.
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