Randall Benderson has been in the business of real estate development for a very long time. While people are constantly confronted on the news with developers who make it big, like Donald Trump, or stories of someone earning millions by acting on a scoop, the reality is that the sector is incredibly risky. As such, Benderson feels that it is important that people are aware of the risks that exist in real estate development.
Real Estate Development Risks According to Randall Benderson
Key is that developers tend to purchase an empty plot of land. They engage in stringent research to determine whether it should be used for a residential or commercial project. If the latter, they then have to determine whether it is suitable for office, industry, retail, or other such space. While research is important and can help to predict the future to some degree, it will always remain a gamble, although that can be said for all types of investments.
One of the key issues that they immediately come across, is that of zoning. The Town Plan determines which land can be used for what, and this means that it can be somewhat restrictive. Rezoning applications are possible, but rarely successful. This is true all over the country, from Tampa Bay to Phoenix and from Sarasota to New York City.
The second key risk is that of finance. The average person only knows about mortgages, which last for 25 to 30 years. These are generally not the loans used by developers, however. This is because a mortgage requires monthly payments, and since developers go for years without having a monthly income coming in, this is not a suitable option. Rather, they pay back the loan at the end of the development period, with interest, in one balloon payment. The big problem is, however, that developers often take out the wrong finance package because they aren’t sure what they can develop on the land, as discussed in the first risk.
Then, there is the fact that developers must find market knowledge from somewhere. Although they are called “real estate developers”, they are essentially manufacturers. This means that they have to create a product, and this product has to have in demand features. Finding out what those features are takes market research. The problem is, however, that it can take a long time before a project is completed, and this means that market knowledge is no longer applicable as needs have changed.
Last but not least, because real estate development has a reputation of being “where the big money is”, and everybody believing that if Donald Trump can do it, they can too, some enter the field without any strategic knowledge. Real estate development is hard work and it takes a lot of experience and knowledge to really become good at it. While some people have made it through luck alone, luck is not something tangible so you cannot count on it.