How I did my own development

I just did an AMA 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.

Comments (59)

Jul 21, 2019

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.

Jul 21, 2019

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.

Jul 21, 2019
luv2speed:

I put together an OM complete with a rudimentary site plan which I did in excel

This is my favorite part of the story. Who needs architects or even bluebeam?

    • 2
Jul 21, 2019

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.

    • 3
Jul 22, 2019

I am extremely curious to see how this turned out.

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Aug 8, 2019

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.

Jul 31, 2019
CRE:
luv2speed:

I put together an OM complete with a rudimentary site plan which I did in excel

This is my favorite part of the story. Who needs architects or even bluebeam?

I agree with you.

Jul 21, 2019

How long did it take to find the equity? What do you anticipate your returns will look like?

Jul 21, 2019

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.

Jul 21, 2019

8.7% IRR? Is this the return at the project level or the return on your equity stake?

Jul 22, 2019

So did you go hard on the land before closing the equity?

Jul 21, 2019

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.

    • 1
Jul 21, 2019

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.

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Jul 21, 2019

Thanks for the reply!

Jul 21, 2019

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.

    • 2
Jul 22, 2019

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!

Jul 22, 2019
REPESailor2020:

Return on your $65,000: $200K

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.

Jul 22, 2019

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.

    • 1
Jul 22, 2019

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!

Jul 22, 2019

Awesome post, SB'd! Keep us updated on the deal!

Also - how old are you?

Jul 22, 2019

Second this- love these types of posts.

Also, how tall are you?

    • 4
Jul 22, 2019

extremely good question here, i hope to see it answered

    • 1
Jul 22, 2019

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".

    • 2
Jul 22, 2019

+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?

Jul 22, 2019

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.

    • 2
Jul 22, 2019

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?

Jul 22, 2019

cool story. how much do you think you'll make? we should all put our money together and build shit.

Funniest
Jul 22, 2019

WSO Realty Partners, LP

We can have the monkeys over in the IB forum raise the LP equity for us.

    • 7
Jul 23, 2019

We get pref based on banana count, right?

    • 1
Jul 23, 2019

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.

    • 1
Jul 22, 2019

Sure thing! Message me and let's connect. I should make about $350k, will look to invest/develop with most that.

    • 1
Most Helpful
Jul 22, 2019

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!

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Jul 22, 2019

I may have missed it somewhere above, but is your codeveloper also a multifamily operator? Curious of everyone's exit plan.

Jul 22, 2019

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.

    • 1
Jul 23, 2019

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.

Jul 23, 2019

Land control.

=/= thread.

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Jul 30, 2019

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?

Jul 30, 2019
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Aug 2, 2019