S.E.C. Real Estate Observer

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Most of us are not spectacular athletes, software gurus, or CEOs of major corporations. We have not patented a marketable invention, starred in a major motion picture, or won a lottery.
Most of us spend our working lives trying to keep our bills paid, educate our kids, and provide enough for a meaningful retirement.
For most of us in real estate, we live a feast and famine existence. Often the big commission check is solely used to pay back bills, and perhaps put a little aside awaiting our next payday. A few of us have bought and kept the occasional property, and, if market conditions are right, have realized a nice profit.

But we in real estate have an opportunity that those in most other professions lack. We have the opportunity to use our talents and professional skills to become rich. If we look around at the wealthy in our country, we see that much of the great wealth has been created in real estate development and ownership. And unlike those who became wealthy inventing computer chips and software programs, those who have become wealthy through real estate do not necessarily possess exceptional intellect and advanced college degrees.

What is real estate development? It is not only entitling a tract of land and constructing improvements. It includes rehabbing an existing building or complex, converting a property from a low demand use to a more profitable one, or just changing the zoning.

Real estate development is not brain surgery. It requires common sense, patience, organizational ability, salesmanship, and some daring. And, equally as important, it requires many of the same skills that those of us in real estate sales use every day.

Let’s look at these elements. Common sense dictates that we don’t build office space when a community has 25 percent office vacancy. It also dictates that we don’t spend years attempting to get zoning and permits for a use in a community that is staunchly opposed to that use on that property. It also dictates that we don’t attempt to develop a million square foot mall as our first development project. Common sense dictates that we look around our community and find a need and then locate a property, improved or unimproved, that can be developed to fill that need.

Once a need is identified and a property is located the developer “runs the numbers.” At this point the numbers are very preliminary. However, this preliminary number running is important as it keeps the developer from spending weeks on impossible projects. If you live in an apartment 10 percent cap rate community, and bidding costs are $40 per square foot, and 800 square foot units rent for $550 per month, even if the land is free, the project won’t “pencil.” It requires patience to sort through dozens of impossible projects to land on the winner.

No developer, when starting, has all, or even many of the skills necessary to complete a successful development. So, what we do is put together and organize a team. The team may include a lawyer, accountant, land planner, engineer, contractor and mortgage broker. The “team” can be compensated in ways that won’t defeat the project through heavy front-end costs.

Organization and salesmanship are required to create and fund an entity that provides equity investors with a relatively sale and profitable investment.

Finally, daring is required to make the change from salesperson to principal, from wage-earner to capitalist, from “getting by” to getting wealthy. As Pearl Bailey once said, “I’ve been rich and I’ve been poor – and rich is better.”