Real Estate Development Risks

Real estate development risks and there control is the number one priority of professional developers or maybe they never get to do another development. I am continually amazed to find after six years of teaching developers that the first thing most do is buy some land with some of their own cash and borrowing the majority from the bank.

To new developers getting control of the land seems logical and yet is the last thing a professional does. So beginning a real estate development by doing the complete opposite to what you should do is putting yourself behind the eight ball from day one and send the 'risk' indicator rising.

From a development point of view land is only worth what you can do with it and that is determined by the Town Plan of your City or Town and the particular zone that applied to the land you are considering.

For example, if you were to buy land that is zoned Rural and you wanted to develop some townhouses or residential houses, you would not be able to do so.

If you bought some industrial land and your idea was to develop some shopping on it you would not be allowed to do so by the Town Plan. Professional developers learn the Town Plan, as well as all the regulations that control development activities in certain zones that are of interest to them.

I mentioned another real estate development risk in the second paragraph that is overlooked in a most cases and that concerns the type of finance selected by a new developer when incorrectly he/she buys land as part of their first action.

In one way it is easily understood because the only kind of loan the average person knows about is a mortgage over 25 or 30 years. But a mortgage is the absolutely wrong type of loan to take out when you are a developer.

Why is that? Well, mortgages have to be paid back every month and that means cash coming out of your pocket every month. That is not what developers' need or only the very wealthy would be able to develop anything.

Developers don't pay the lender of development finance every month out of their cash flow (pocket). The amount of interest is calculated on a monthly basis on the amount a developer draws down from the lender. That interest is then added to the pay back amount required at the end of the development.

If you buy a number of industrial sites and your idea is to develop some of its shopping you will not be allowed to do such a plan. Professional developers to understand urban planning, as well as the rules and regulations to control in that they are interested in some of the regional development activities.