Business

Real Estate Developer Companies: How Do They Work?

Between 2010 and 2019, close to 7 million new homes were built in the US. In many cases, the eventual homeowner planned and financed the entire process from start to finish. Of course, many of those homes also went up as part of large-scale real estate development projects.

For example, housing tract developments in suburban areas are very common. Those kinds of projects almost always happen with the help of real estate development companies. So, what exactly do real estate companies do?

What is Real Estate Development?

Some people think of real estate development as little more than general contracting. The reality is much more complex.

Real estate development involves an end-to-end process that involves:

  • Acquiring raw land or distressed properties
  • Building or renovating those properties
  • Marketing or managing them on different platform with the uses of social media.

For example, let’s say that a natural disaster strikes an area right outside of a town or city. The damage is bad enough that a whole neighborhood is essentially rendered unlivable.

A real estate developer might come in and buy all of that property. They plan a new residential neighborhood. Then, they build that neighborhood.

Once the construction is complete, they market those homes to their target demographic. While it sounds straightforward, actually doing it can take years. Let’s jump into some of the specifics.

Initial Concept

Most real estate development starts with a concept based on the kind of property available. For example, a developer might see an undeveloped area of land. They see an opportunity for a middle-class neighborhood or even a complete middle-class community.

Alternatively, a developer might run across an area that is largely abandoned. That developer can see an opportunity for an industrial park or commercial center.

That initial concept drives everything about the project moving forward. It functions as the overall vision for the project. Different real estate development companies focus on different kinds of projects,

Research and Planning

Once real estate developers settle on final versions of their concepts, they must move into the research and planning phase. Things that they must account for include:

  • Zoning
  • Preliminary building designs
  • Renovation or building costs
  • Environmental impact
  • Timeline to completion

For example, let’s say that the current zoning for an area is residential. If a development company wants to build an industrial park or commercial center there, they will need a zoning change.

That will require approval from the local government, which is never guaranteed. The company must evaluate the odds that they’ll receive the zoning change they need.

Industrial parks, in particular, are subject to environmental damage concerns. So the company may need an environmental impact study, particularly if the development will neighbor other residential areas.

They must also consider what kind of buildings they’ll put in place so they can develop a realistic budget for the project. The expected budget may ultimately kill a project before it starts because the numbers are too high.

Financing

Some real estate developers finance projects out of pocket. This happens more often with smaller, residential development projects. The materials are less expensive and there are fewer regulatory hurdles to navigate, which makes them a little faster and cheaper.

For large-scale residential projects, industrial projects, and commercial projects, the development company typically secures outside financing. There are many potential sources of financing, such as banks, real estate investment trusts, and private investors. There are even real estate finance companies that specialize in connecting investors with projects.

The right investors will vary from project to project. For example, private investors might take an interest in a residential project, while a major local bank might take an interest in a downtown commercial property project. Finance companies and REITs often invest in a wide range of projects.

For a closer look at real estate development financing, you go here for more info.

Approval

Let’s assume that the budget proves feasible and you can secure preliminary financing. The development company then seeks approval for the project from the local government.

The company lays out the project and its potential benefits to the city or town. For example, the project may create jobs or attract other kinds of investment in the community.

The company must also allay any concerns brought up by the local government. For example, the local government might worry about displacing low-income families, environmental concerns, and potential disruption of local services.

If the local government signs off, the company must commission finalized designs, architectural plans, and submit them for approval.

The approval process may involve public meetings where citizens can pose questions or voice concerns. Assuming no major hurdles present themselves, the town approves the project. Then the company must lock in contracts and investors if any outside investment is necessary.

Marketing

During the build phase, the company will start marketing the property to potential buyers or lessees. For residential properties, it’s typically potential homeowners. For commercial or industrial projects, individuals or companies might want to either buy or lease the properties based on their needs.

In some cases, the development company itself will transition into property managers if they plan to lease all of the property.

Getting into Real Estate Development

Wondering how to become a real estate developer? There isn’t one straight path into real estate development.

Some people start out as real estate agents. Others come out general contracting or property management. Expertise in the local real estate market will prove very helpful.

Taking a position in a development company will give you the most hands-on experience.

There is no specific degree you need, although many developers hold an MBA. A few universities offer a masters in real estate development.

The Role of Real Estate Developer Companies

Real estate developer companies play an important role in community expansion and renewal. These kinds of companies take on projects that are either outside of a local government’s purview or beyond their budgets.

They create housing. They salvage commercial properties and make them viable again. They also help stimulate local economies with new jobs and material purchases.

Want to learn more about starting or running a business? Check out the post over in our Business section.

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