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.
How many units are you building and what's the general neighborhood like? How long will it be until the development is finished?
That's amazing to have found a piece of land on loopnet, most of the time i hear most developers find up stuff that's an off-market deal.
Class A- product in a B location. Less than 100 units. Should be finished in 18 months (breaking ground soon). Yes loopnet has some good smaller size opportunities for sure.
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.
I am extremely curious to see how this turned out.
Super clever workaround, and is the exact kind of creative thinking that leads people like you into development. ...but seriously, Sketchup is free and incredibly simple to learn. Can express almost any physical idea in it, and is remarkably intuitive.
While I love the idea of drafting in Excel, there are free tools out there that work very well at what you are trying to do and would save you a ton of time. No need to reinvent the wheel on this.
I agree with you.
How long did it take to find the equity? What do you anticipate your returns will look like?
Longer but than I thought it would! It was 4 months until I got a yes and then another month before term sheet was signed.
Returns were 8.7 unlevered.
8.7% IRR? Is this the return at the project level or the return on your equity stake?
So did you go hard on the land before closing the equity?
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.
Thanks for the reply!
Good work hustling to make it happen, this story is a prime example of good luck = where hard work meets opportunity.
Thank you for posting all of the details and explaining your process.
Sourcing: $150,000 estimating the development fee to you is: $30,000 Return on your $65,000: $200K
$380,000 - $65,000 contribution = $315,000
Pretty sweet!
How did you come up with that number? He said he's making ~8.7% IRR. Figuring a 3 year hold on 65,000, that means 83,500 or so, not 200k. Highly doubt he's hitting a promote at that level of returns.
Which means the math is $150,000 + 83,500 + more like 50,000 for the fee and you're at 283,500-65,000, so more like $221,500. Again, nothing to scoff at, but most of that is coming as a deal sourcing fee. I get the impression he'd have been a lot better off flipping the contract for the now-fully-entitled land. He still gets experience in the local development process and will be much better capitalized to take advantage of the next opportunity.
But nitpicking aside, this is awesome man, and do keep us in the loop on how it turns out.
I was assuming the 8.7% is an unlevered IRR, no development would get off the ground for less that 15% project level IRR. Plus the promote, plus his 20% stake in the GP stack for his 10% contribution.
Yes that sounds about right! Except that my part of the dev fee should be about $60k hopefully. Definitely not bad assuming all goes well!
Awesome post, SB'd! Keep us updated on the deal!
Also - how old are you?
Second this- love these types of posts.
Also, how tall are you?
extremely good question here, i hope to see it answered
Yes I will! I’m late 30s but look 10 years younger, which I think has a lot to do with my being able to get the jobs I got despite being “non-traditional age”.
+1 This is great info - thank you!
You mentioned that the deal is in a 2ndary market, is that the market where you are based? It sounds like your day job isn't necessarily working in the same area and/or asset class - do you feel like your experience helped you with some of the entitlement/predevelopment work or was that a lot of learning on the fly?
Good questions. The deal was in the market I’m based in. I don’t think I could have done it otherwise because I had a lot of meetings and such in the pre-dev and entitlement phase and wouldn’t have been able to just take off work and trace to a different city all the time.
My development experience, though sparse, definitely helped. Also being on the investor end and reviewing JV pitches from local developers - I knew exactly what they wanted to see so I just gave it to them.
Thank you! Very good info... Did you consider selling the project to another developer once you secured the entitlements? (vs. staying in to see it through) I imagine that this way will give you more credibility in the future (developer, not just a land speculator), or were the economics better for you as well?
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.
We get pref based on banana count, right?
There are some here who I think will end up being fantastic GP's. There are others here who I would not trust with the change I find in my car.
Sure thing! Message me and let’s connect. I should make about $350k, will look to invest/develop with most that.
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 may have missed it somewhere above, but is your codeveloper also a multifamily operator? Curious of everyone's exit plan.
Codeveloper is multifamily owner but not operator. We will outsourced management. Some properties they sell after 2 years and some they hold. Actually we haven’t even had that conversation. Their calculation of my return exited in year 2 so I’m guessing that’s It. I guess I should ask them but I just haven’t ever wanted to spook them if they want a long term partner. I never wanted them to feel like I just wanted to take the money and run (being just an unknown to them). We are still in pre-dev so once things get more certain I’ll bring it up.
I'm basing this comment only from learnings in the classroom, but it seemed sound advice - never start a project without knowing your exit. Reference Empire State Building... something something... lesson learned.
Land control.
=/= thread.
Curious to hear at what tasks you think the co-developer excelled and that you couldn't do on your own, even if it would take longer. Obviously experienced developer had their own architects, GCs, CMs, tools, etc. But it sounds like you've been in the industry long enough you have many of those, too. What did you learn from watching the co-developer? What decisions did they make that you disagreed with, would have done differently, even though as a managing member you also had a say?
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.
Very inspiring post. I'm still in school and my plan is to work for a big development shop in NYC and eventually do my own deals/start my own company. Thank you for the great advice and I hope it all goes well!
luv2speed Would love an update on how things are going here if you have a chance!
Agreed!
Mollitia deleniti nemo nesciunt. Doloremque architecto dolor recusandae. Facere laborum illo perferendis voluptates nobis exercitationem aut sed. Officia a quo voluptatem quasi iure molestiae laborum. Molestiae in et est quas ut sed tenetur et.
Harum velit omnis nihil doloribus id expedita dolorem. Laudantium porro nesciunt tempora. Consequatur alias illo sit aut sint inventore necessitatibus.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Praesentium nemo omnis quis necessitatibus earum. Quaerat impedit corporis ratione ducimus at. Est suscipit nesciunt fugit velit consequatur non.
Dignissimos veritatis suscipit officiis ut. Minus accusamus non deleniti accusamus eos provident quos. Maxime velit sit laudantium molestiae. Doloremque rerum incidunt eum modi beatae illo. Quia doloribus quos ducimus sapiente quos. Error quasi ut voluptas aut similique sit fugit nesciunt. Repudiandae ut quos dolores sed dolores sit.
Ad cum molestiae qui quia. Sed deserunt qui occaecati ipsum laboriosam ea sit. Error quia vero dolores tenetur sint tempore quis.
Sit dolorem aut et eveniet vitae quia. Nulla illo aliquam distinctio ut. Voluptatem nihil fuga assumenda itaque asperiores illo. Nulla tempore neque esse facere ratione commodi. Ut corporis error fugiat quo.
Corporis maxime sequi vel accusantium. Iure magni a quidem similique consequuntur debitis distinctio. Error molestiae voluptates sed cum qui.
Expedita rem assumenda dignissimos voluptatem. Dignissimos ut qui dolorem nam et. Veniam voluptatibus nostrum doloribus dolore ut magni rem.