A story about 2 new real estate developers, Chad and Greg

Meet Greg and Chad (names changed for privacy).. two real estate investors looking to do their first development.

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• Both men, had invested in real estate for years.?
• They both had good jobs.?Families.
• Both came to me for help to do their first project.
• The difference, was in their approach.

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The purpose: of this article is not to pick on Greg.?It is to give you a roadmap to doing your first development and the common pitfalls I see new developers fall into.

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Premise: The barrier to entry to real estate development is high.

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Problem: New developers feel like they are spinning their wheels and stuck.?

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Chad, came to me a few years ago.?

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I’d known him for a while; a great guy who wasn’t afraid of hard work.?He asked me to mentor him on his first real estate development.

I was a bit surprised because Chad was already doing well in real estate, he owned several properties and it looked like he was doing well.?

But, he wanted to get into developing real estate and knew that he needed someone to guide him.?He engaged me on a retainer to teach him the game of real estate development.?

Once we found a site he could develop, he asked if I could partner with him on the property.?Now, he could have done the deal on his own.?But, he saw the opportunity to keep me in the deal to help him through it as more valuable than trying to wing it on his own.???

We were 50/50 partners where we each brought certain things to the deal.

Looking back, it was like a paid apprenticeship.?He was paying to learn (forgoing some of the upside) but learning the skills to do it on his own.

The development took about 18 months and concluded last year.?We were rented up in under a month and able to pull out about ? our the initial equity we put into the project.?

Now, this doesn’t happen in every development.?I have others that are far more complicated and longer to execute on.?But, this one worked very well.

Today, Chad is a partner on several other projects (multiple 8 figures) and doing some of his own.?

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Greg on the other hand, is taking a different approach.?(BTW- this is a more common approach).?

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He came to me with a property he found. ?It was a good location, and his plan was to tear it down and build an 8 unit stacked townhouse.?

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Greg’s first question to me- Shane, how much is going to cost to build??How do I know if this property will work?

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Having this conversation hundreds of times, I know this question of ‘how much’ is not the real question.?(I know, because, I wrote a 9 page article on our website explaining the different types of townhouses, how much each cost, what land should cost and soft costs).

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So, it’s not about the cost.

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It’s about trusting themselves to actually do it.

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They don’t trust themselves and therefore they have a hard time trusting others.?

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I don’t blame them.?Without a clear goal, and plan – it’s hard to know what questions to even ask.?Or, how to evaluate the information you’re getting.

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Back to our first call.

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I could tell by the question: “How much will it cost to build” that Greg had not taken the time to really think through what he wanted.??

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To answer the question, I need to understand a few things:

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1. What are you trying to build?
2. For sale, rent?
3. Stacked, or slab on grade?
4. How big?
5. Attached or detached garage?
6. Mid-block or corner site?

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?We spent the next 30 mins discussing the costs, revenue and how the project could go.??

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I gave him several pieces of intel that could have saved him $100k in mistakes and gave him the formula for his BOE (back of the envelope).??

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I knew that even though I’d given Greg some great information, that he still had questions and concerns.

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It’s a big decision to build a townhouse.?It could cost $2.6-2.8M.?If you make a mistake, it could wipe out 5-10 years of savings.

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Which is why I feel trying to go it alone is not a good strategy.?

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(If you don’t know my story, I quit my 6-figure job in 2008, to go full time into commercial real estate and learn development.?It took several years before our first project paid out.?I paid in my time and the opportunity cost of earning 100k/year safely at my job.?So, yes, I believe in getting a mentor).?

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Greg was doing a good job of researching and talking to people.?

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But the information was fragmented, because he didn’t really know the sequence or what questions to ask.?It’s like getting a puzzle piece but not having the full picture to see where or how the pieces fit.

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You need the pieces to build the puzzle, but what if you’re building 2 different puzzles??If you don’t know what the picture is supposed to look like, then you can end up half building several puzzles and never getting 1 complete.

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Compared to when I talk with developers who have 5+ projects- they come to a meeting prepared and organized.?They ask specific questions and give me very clear answers.?They know what they need to advance and it’s generally a very productive conversation.

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This is not generally the case with new developers.

For a new developer, they are in exploration mode.?They jump around.?One minute we are talking about costs, the next zoning, then financing and rents.?It’s sporadic because they don’t know what they don’t know.

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They are hoping they can get everything in 1 conversation.

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Which makes it’s difficult to help and offer guidance.?

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If you’re a developer, looking to meet with people who can help you, starting with a clear destination is a great start.??

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1. What are your core objectives??
2. How much time, risk, capital, energy can you (the developer) put forth?

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If you’re wondering why it’s hard to get serious professionals in development to take you seriously, it’s because they have these conversations with new developers and 9/10 go nowhere.?

The would be developer figures out it’s too difficult and decides not to purse.

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The expectations of a new develop on their team (contractor, architect or consultant) are that things should be smooth and easy.?The developer hasn’t thought through the potential problems (how could they, they’re new), and so when asked how they plan to handle something, they get frustrated.

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Isn’t that why I hired you??

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As a developer, if you expect your team to solve all your problems, you should not be in the development game.

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Experienced developers expect problems (and almost embrace them).?They know that problems are what they get paid to solve.?

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Otherwise, every architect, GC or consultant could go out and develop properties (which doesn’t happen).

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Where do these problems arise?

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In a development, there are a lot of people required to get a project across the goal line.?With more people, come more problems.

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?People on your team will have different motivations.?And can take your project off course.

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• One neighbor can derail your project for months/years.
• One planner, inspector or councilor can hinder your project.
• An architect not getting along with the GC can ruin a project.

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As the developer, it’s your job to keep everyone moving towards the goal you set.?And, to know what is acceptable and unacceptable.

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After 15 years of developing, I’ve had hundreds of problems that needed to be solved.?And, no 2 developments are alike, which means I’m still learning.

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When an experienced developer starts a new project, they already have a base of knowledge to work from.?To help navigate common problems as they arise.

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A new developer won’t have those skills or experiences.?They lean on their team too much.?Which, is dangerous.?Because the more you give control over to your team, the more it costs and less you influence the outcome.

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This is why, if you’re new development, having someone guide you through is a worthwhile investment.?

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This article is not meant to sell you on the idea of joint venture with someone to do your first development.?That was a unique circumstance.?There are other service providers that can help you navigate a development (with experience and are your representative).?

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The point is to illustrate that going alone can be frustrating and costly.?And, going solo you will be paying to learn lessons that could have been avoided if you had someone that could walk you through the project.

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The barriers to entry for real estate development are high.?And it’s one of the reasons so few are successful (make money).

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You can read books, and go to seminars, listen to podcasts – but until you do a project, you will not know what it’s like.?Just like you can’t learn to swim or ride a bike, reading a book.?You need to be in the trenches of a development to fully appreciate what it takes.

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Understanding the stakes are high, my recommendation is to find someone who you can pay to help you through the process. ?

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If you take the long-term approach to developing, your first project is how you learn the game.?You might make less money, but you live to do another development.

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By the time you get to project #5, you’ll understand the game better and be able to do them on your own.?And that’s my hope.?That you get to development #5.?Because, for us (our construction business) is built on long term relationships with developers.?We want to work with developers year after year.?It’s too much work to work, for both the developer and builder to do a one-off project.?Much better business to build the long-term relationship (like Chad).?