I just did an Q&A on becoming a RE developer. This is a follow up post to how I did my own deal as an analyst...
They laughed and told me “sounds great, good luck”.
Searching loopnet on a regular basis, after a few months I found a piece of land ideal for my target market and product (multifamily). I contacted the broker about the land, got him comfortable with me, and asked him to be my dual agent. This way (earning double the commission) he is my ally and also is motivated to sell to me as opposed to another (more qualified) party.
I told my office what I wanted to do so that there were no conflicts of interest, or any claim in the future to my deal. They laughed and told me “sounds great, good luck”. I don’t think they really thought I’d succeed.
The sellers were understandably leery at first and so I offered to give them a presentation of my plan and monthly progress updates. I put together an OM complete with a rudimentary site plan which I did in excel, floor plans, market comps, budget, etc. - same type of package I used for investors later. It worked and they agreed to sell. We settled on $1.4M. I put down $20,000 earnest money, which I had from a rental property I sold, a 6 month DD period, and $10,000 going hard at 4 months. This is a secondary market so those terms worked, I’m sure it’d be different in a primary market.
So I got the land under control and proceeded to get city approvals. Working with the neighborhood was a bitch. A lot of politicing and meeting with the city several times to get them on my side instead of the neighborhood. Instead of a zoning change the city agreed to a variance allowing me to build the density I needed.
No one trusted me
Concurrently with entitlements I started pounding the pavement with my pitchbook/OM. I connected with people on linked in, contacted wealth management companies, and asked for referrals for which I offered percentage compensation. No one trusted me except a few larger development companies with capital, which offered to codevelop with me. I told groups I was confident I would get city approval but we would make the agreement contingent on that. Having skin in the game (I told them I’d contribute all I could afford - $65,000 or 1%) was extremely important to everyone I talked to. I took out a home equity loan for the balance above my $20,000 plus $10,000 I had saved up.
They sent me a term sheet: $150,000 for sourcing, payable upon financial close. They would guarantee the loan. The equity capital stack is this:
- $6.5M equity total
- They will raise 90% and supply 10%
- Of that 10% I contributed 10% but got credit for 20%.
- I also got 10% of the dev fee.
I had a GC partner and architects to get to a general budget and concept, but they ended up using their own. They are the managing member but all major decisions go through both of us.
With my limited funds I had gotten a survey and had architects to do a concept plan but when the partner signed on we proceeded with the rest of the due dili and released the engineers and architects to proceed with SDs and DDs.
I’m still employed because development is so fickle and expensive, but maybe I’ll do this full time someday. In the meantime it’s nice to have some extra cash and credibility!
Hope this helps others break off on their own! Feel free to ask me anything.
This is my favorite part of the story. Who needs architects or even bluebeam?
Thanks man! Yes I moved the columns in an excel spread sheet to make a perfect square with the rows. Each square was equivalent to 10 sf. I put a decimal point in each square to be able to quickly count the squares/sf. Then shaded and bordered what I needed to to build a building footprint on the size of the site. I can’t remember where I got that idea (can’t take credit) but it was an awesome one.
Fantastic post, really admire your grit.
I work on the investment side of several RE development deals, I think in your earlier post you also mentioned you have several years of CRE dev. experience. How important do you think it is to actually have experience running the development process? Maybe not just in terms of your capabilities but in terms of convincing developers/lenders you’re the real deal? What kind of experience would you suggest having before taking these sorts of risks on small deals?
I’ve worked on development deals for years, but generally it’s riding shotgun with the developer, approving draws, looking at site plans, looking at RFPs for future leases, reviewing construction contracts, etc.
With your experience riding shotgun on developments I think that might be enough to convince codevelopers, but maybe not lenders/investors. Someone pointed out to me that you’re gonna make mistakes on your first few developments, so why not make them on a small development rather than a large one. If I could have started small I would have, but honestly I didn’t but know small since I only worked in bigger ($10M+) deals. Plus I didn’t have capital or the balance sheet to do even a small deal. Probably the biggest I could have done on my own would have been $500k. Added to the fact that I didn’t have my own development experience and knew I needed someone with more experience... my only option (and the best I think) was getting control of the land and working with a codeveloper. So I think you could do the same thing. The key is getting the land under control.
Second this- love these types of posts.
Also, how tall are you?
cool story. how much do you think you'll make? we should all put our money together and build shit.
WSO Realty Partners, LP
We can have the monkeys over in the IB forum raise the LP equity for us.
Something I wanted to reiterate is the importance of getting the land under control. The year before this one I had tried to do another deal, a bigger one which required earnest money I didn’t have, so I found some wealthy guys to “partner” with (after again creating a kick-ass OM). Six months later the land was basically taken from me for them to develop and they were “kind enough” to offer me a job as a consolation prize (which of course I didn’t take).
Hindsight 20/20 what I should have done was put an option on the land and brokered the deal. Someone told me they could get me $200k for the land and my plan and I should have done it. Lesson learned and hope someone else can benefit from knowing not to make the same mistake!
I was mainly worried about what I didn't know since I'd never run the dev process 100% on my own. But now that I'm in the thick of it I can't think of anything they could do that I couldn't. Like you said, I had all the contacts and such, so I didn't need that. I guess the main thing was the capital - being a codeveloper incentivized them to invest and I don't know that they would have if I wouldn't have let them co-develop. Also time - they've put a development manager on it to oversee everything so that I don't have to chase down architects, engineers, city planners, or complete paperwork, order reports, etc.
One thing they did do that I wouldn't have was to pay for an in-depth market study to determine exactly what we should build. This yielded some interesting results I hadn't realized and actually helped the pro forma. We haven't broken ground yet though, so I'll keep you posted about other lessons learned. Good for me to document those anyway - thanks for the question.
Also, their experience will get us better lending terms. We're going to have to get a bridge loan in order to close on the land before we get approvals in hand for the construction loan, and I don't know that someone would have given me that without them.