Real Estate Development Business Plans

There are a lot of benefits to getting involved with construction deals. As Chris Somers noted in a conversation with Ian Walsh, which you can watch here, there are some key points to consider when looking at a new real estate development business plan.

First is the amount of upside. Certainly, those who know what to buy and where to build can make boatloads of money from these projects. And, in addition to cash made from the deals, they can help investors establish themselves as integral members of the community. People who build useful properties and create temporary construction jobs for local residents can boost their reputations, which can pay off down the road in a number of ways.

Nevertheless, making money on new construction projects is difficult these days. There is a lot of competition for those deals, and the margin of error is a lot smaller than it is on your typical flip—meaning your overall strategy, planning, and execution need to be incredibly sound.

I have access to amazing resources that I would like to share with you, so that you have all of the tools you need to build a sound real estate development business plan. I have interviewed real estate developers for my podcast, The Best Ever Show, who know how to find the right locations to build, figure out when building should begin, have trustworthy contacts in the construction business, and understand how to legally navigate these undertakings.

If you want to learn more about new construction opportunities, feel free to get in touch with me by clicking here. If you are ready to get to work, it’s time to reach out and schedule a planning session so we can start making money together.

Also, I invite you to check out both volumes of my real estate investing book, and to download my mobile app, which makes it easy to keep up with my daily podcast.

Commercial Real Estate Lending: What is the Ideal Multifamily Loan?

Do you know what the greatest ongoing expense is for real estate investors?

Assuming debt was secured to acquire the asset, the great expense is the ongoing debt service.

Since the debt service is not included in the net operating income calculation, it do not impact the value of the investment. However, it does impact the cash flow, which in effect impacts the returns to passive investors.

Therefore, being the greatest expense and impacting the return to passive investors, securing the best loan is of the utmost importance.

The purpose of this blog post is to help active apartment syndicators and passive apartment investors alike to understand how to know what the most ideal commercial real estate loan for a particular multifamily investment is. To accomplish this task, this blog post will outline the following:

  • What lender should be use?
  • Should an agency approved lender always be used?
  • Should a mortgage broker or a lender be used?
  • When is the best time to engage with the lender/mortgage broker?
  • What are the qualifications of the borrower, deal, and market?
  • What are the upfront reserve requirements?
  • Are renovation costs included in multifamily loans?
  • What should be looked at when comparing multifamily loan options?

What lender should be used?

The ideal multifamily loan is an agency loan for most apartment syndications. The main exception is if the business plan includes an early exit – via a refinance or a sale. When this is the case, a non-agency bridge loan is ideal because a borrower won’t be required to pay a prepayment penalty (more on this in a later section) at sale or refinance?

When pursuing an agency loan, what lender should be used?

With an agency loan, a lender provides a borrower with debt to purchase an apartment. Rather than holding the mortgage loan on their books, the lender sells the mortgage to an agency. Hence, an agency loan.

The agency pools together thousands of mortgages, which are sold to private investors and investment firms on the open market as mortgage-backed securities (MBS).

The two agencies that purchase and resell mortgages as MBSs are Fannie Mae and Freddie Mac.

Both agencies guarantee the MBSs. Since Fannie Mae and Freddie Mac are government-sponsored entities (GSEs), the MBS are implicitly backed by the Unite States government. Therefore, in order to provide a guarantee, the agencies only buy certain types of mortgage from approved providers.

Fannie Mae was created first. Later, Freddie Mac was created to generate competition in order to drive down interest rates and fees for both the borrowers, the lenders, and the MBS investors.

Since Fannie Mae and Freddie Mac are buyers of mortgages, they do not work directly with borrowers. Therefore, to obtain an agency loan, a borrower must work with an approved lending institution.

Fannie Mae only buys loans originated from Delegated Underwriting and Servicing (DUS lenders). As the name implies, Fannie Mae delegates the underwriting and servicing of the loans underlying their MBS products to third-party institutions that meet their strict qualifications. Therefore, in order to obtain a Fannie Mae loan, a borrower must work with a DUS lender. Fannie Mae has a list of approved lending institutions on their website, which you can view here. Currently, 25 lending institutions qualify for DUS status.

Freddie Mac also has approved lenders called Optigo conventional lenders. The list of Optigo lenders is similar to the list of DUS lenders. You can view Freddie Mac’s list of approved lenders here.

Should an agency approved lender always be used?

One of the major benefits of an agency loan are the terms. Agency loans generally result in lower down payments and/or lower interest rates. Consequently, debt service payments are lower compared to non-agency loans, which means a higher cash-on-cash return.

However, as I mentioned above, the deal and the borrower (and their team) must meet the agencies strict qualifications.

So, yes, a borrower should always use an agency approved lender, assuming they and the deal qualify, and they projected hold period is longer than the prepayment period. If the borrower and/or the deal do not meet their criteria, or the plan is to exit the loan after a few years or less, the borrower may still be able to use an agency approved lender since most offer more than just agency loans. However, they will not qualify for the best rates and terms.

Should a mortgage broker or a lender buy used?

There is an exception when it comes to securing agency loans. Borrowers can secure an agency loan without working directly with an approved institution by working with a mortgage broker.

A mortgage broker acts as an intermediary between lending institutions and borrowers.

There are countless different multifamily loan programs offered at any given time. Rather than finding the best loan on their own, borrower relies on the expertise of a mortgage broker or lender. The borrower submits information about the deal and the mortgage broker or lenders returns the best loan program option/s.

A mortgage broker is not limited to loan programs offered by a single lending institution. They have a network of many lending institutions, which means they can find the lending institution that offers the best terms for that particular loan program. When a borrower works directly with a lending institution, their options are more limited.

Since the mortgage broker is an intermediary, however, they charge a fee for their services.

So, who should be use? I think it makes sense to work with a mortgage broker. Sure, the expense to secure the loan is higher. But since they have relationships with multiple lending institutions, they will likely underwrite a loan with better terms that offsets the broker’s fee.

When is the best time to engage with a mortgage broker/lender?

A borrower should already have engaged a lender or mortgage broker prior to looking for deals. Based on their and their teams background, the lender or mortgage broker will let them know which loan programs and how much debt they qualify for.

With this information, the borrower will know which type and sized deals to pursue.

Then, when the borrower is interested in submitting an offer an a specific deal, the mortgage broker or lender can quickly provide a quote (since all they need to do is fully underwrite the deal as opposed to fully underwriting the deal and the borrower). The borrower will have an idea of the down payment and debt service so that they can submit a more accurate offer.

When a borrower doesn’t engage a mortgage broker or lender before looking for deals, they may over-estimate the type and size of deal for which they qualify. They may submit an offer, get a deal under contract, and get forced to cancel the contract because they cannot qualify for financing (or the financing results in a higher than expect debt service). As a result, the borrower’s reputation is tainted in the eyes of the seller, listing commercial real estate broker, their property management company, and their passive investors (depending on how far into due diligence the deals was when the contract was cancelled).

To avoid these issues, the borrower should engage the mortgage broker or lender for even looking at deals.

What are the qualifications of the borrower, deals, and market?

Both the borrower and the deal must meet specified criteria in order to qualify for Fannie Mae and Freddie Mac debt.

The borrower includes the guarantor, key principals, and principals.

  • The guarantor is who guarantees the loan.
  • The key principals are any person who controls and/or manages the partnership or the property, is critical to the successful operation and management of the partnership or the property, and who may be required to provide a guaranty.
  • The principals are any person who owns or controls specified interests in the partnership. When the partnership is an LLC, a principal is anyone who owns 25% or more membership interest (this includes passive investors too).

Agency lenders will analyze the borrower based on the organization (i.e., entity) structure, multifamily and business experience and qualifications, general credit history, and current and prospective financial strength. What is considered passing criteria is based on the size, complexity, structure, and risk of the deal.

  • Organizational Structure: For most agency loans, only single purpose entities are eligible borrowers. This means you will need to create a new entity for each transaction. The exemptions are the small balance agency loans in which individuals and non-single asset entities are eligible borrowers.
  • Multifamily and business experience and qualification: Fannie Mae and Freddie Mac have different ways to qualify the borrower based on experience. Fannie Mae uses a service called application experience check (ACheck). ACheck checks the borrowers experience with Fannie Mae loans in the past. Generally, a member of the borrower must have been a member of the borrower on a previous Fannie Mae loan to “pass”.

Freddie Mac provides more specifics on how they qualify borrowers. The borrower must have a minimum of three years’ experience in the same capacity that it will have for the proposed transaction, and acquired, developed, or owned a minimum of three properties. Also, the borrower must own and manages other properties in the market where the subject property is located. If the borrower is lacking in one or more of these areas, Freddie Mac may require a higher replacement reserve deposit.

  • General credit check: The lender will conduct a general credit check on the borrower, checking for other loans and liabilities to determine their ability to fulfill the debt obligations based on the current and past debt obligations.
  • Current and prospective financial strength: The agencies do not have specific liquidity and net worth requirements for the borrower on their conventional loan programs, which means it will vary from deal-to-deal. They may require more upfront reserves if the borrower has weak finances.

We can get an idea of what the agencies require regarding liquidity and net worth by looking at the stated requirements for their small loan programs.

For Fannie Mae’s small loan ($750,000 and $6,000,000) and Freddie Mac’s small balance loan ($1 million to $7.5 million) programs, a minimum liquidity of 9 months principal and interest and a new worth equal to the loan amount is required.

Assuming the borrower qualifies for agency debt, the next check is the deal.

To qualify the deal, the lender will analyze the property, the occupancy, the property management company, and the market.

  • Property: The agencies only provide financing on certain types of properties. However, most multifamily properties you look at will meet their requirements. The requirements are standard characteristics like five or more units, accessible by road, the units have bathrooms and kitchens, water and sewer service, up to code, access to emergency services, etc.
  • Occupancy: The major factor that determines if a deal qualifies for agency debt is the occupancy.

Fannie Mae’s conventional loan program requires a minimum physical occupancy of 85% and a minimum economic occupancy of 70% for 90 days. The occupancy requirements are even higher at 90% for their small loan program.

Freddie Mac’s conventional and small balance loans require a minimum physical occupancy of 90% for 90 days.

  • Property management company: The property management company who will manage the deal post-closing will also be analyzed by the lender. The agencies do not have restrictions on the type of management company, which means it can be in-house or third party. However, the property management company must have adequate experience to ensure effective administration, leasing, marketing, and maintenance, and is staffed appropriately for the type and size of the property and the services provided.
  • Market: The agency will also analyze the strengths and weaknesses of the market in which the deal is located. They characterize strong markets as having low vacancy, minimal rental concessions, stable or increasing tenant demand, good balance of housing supply and demand, stable economic base, and employment diversification.

Also, certain loan terms will vary based on the market. For example, Freddie Mac has different minimum DSCR and maximum LTVs for top markets, standard markets, small markets, and very small markets.

What are the upfront service requirements?

The agencies have increased their reserve requirements in responses to the coronavirus pandemic.

Fannie Mae is currently requiring 12 months of principal and interest for loans of $6 million and more, and 18 months for loans of less than $6 million. However, if the debt-service coverage ratio (DSCR) is 1.35 or higher and the loan-to-value (LTV) is 65% or lower, Fannie Mae only requires six months of principal and interest. If the DSCR is at least 1.55 and the LTV is 55% or less, no reserves are required.

Freddie Mac is currently requiring nine months of principal and interest on loan with DSCR less than 1.40, six months on loans with DSCR 1.40 or higher, and 12 months on small balance loans.

Are renovation costs included?

Both Fannie Mae and Freddie Mac offer loan programs which cover the costs of renovations.

Fannie Mae offers a DUS moderate rehabilitation supplemental loan (mod rehab). This is a supplemental loan that can be secured in addition to the conventional DUS loan to cover renovation costs. Unlike standard supplemental loans, the mod rehab loan doesn’t have a one-year waiting period. The main requirements for the mod rehab loan is that Fannie Mae must be the only debt holder on the property and minimum renovation costs of at least $10,000.

Freddie Mac offers two renovation loans – moderate rehab loan and value-add loan. The main different are the renovation costs requirements. For the value-add loan, renovations must be between $10,000 and $25,000 per unit. For the moderate rehab loan, the renovations must be between $25,000 and $60,000 per unit with a minimum of $7,500 per unit designated for interior work.

Therefore, if renovations are less than $10,000 per unit or greater than $60,000 per unit, a borrower will have to cover 100% of the renovation costs with passive investor capital or secure a bridge loan through a mortgage broker.

What should be looked at when comparing multifamily loan options?

Here is a list of factors to be aware of when you are analyzing loan options.

Debt service is the payment owed to the lender each month. The lower the debt service, the greater the cash flow. However, the loan option with the lowest debt services isn’t automatically the best option. The debt service may start low and gradually increase if the interest rate isn’t fixed. The debt service may be low but the closing fees are too high, or the loan may not be assumable, the prepayment penalties may be high, etc. Therefore, the other factors which are outline below must be taken into account in addition to the debt service.

Loan amount is the total amount of money a borrower will receive from the lender. The different between the loan amount and the total project costs is the amount of equity a borrower will need to raise.

Loan term is the number of months until the loan must be repaid in full. On shorter-term loans, a borrower may have the option to purchase one or multiple loan term extensions. Ideally, the total possible loan term is at 2x the projected business plan. For example, for a value-add business plan with a renovation timeline of 24 months, the maximum loan term should be four years. That way, a borrower isn’t forced to sell or refinance. However, the longer the loan term, the higher the interest rate, so the longest term isn’t necessarily the best term.

Amortization is the time period the principal and interest payments are spread over. The greater the amortization, the lower the debt service. Usually, the interest payments aren’t spread out evenly during the amortization period. Instead, the first payments are mostly interest (so the lender makes their money upfront) and the interest gradually reduces over time.

Interest-only period is the number of months of interest-only payments. At the end of the interest-only period, principal and interest payments are due.

The main benefit of interest-only periods is the increase in cash flow, resulting in a higher internal rate of return (IRR) since money is returned sooner. This increase in cash flow is even more beneficial on value-add deals because cash flow is generated from day one before the increase in revenue is realized from the renovations.

However, there are a few potential drawbacks. Firstly, there is no principal paydown, which impacts future supplemental loan or refinance proceeds. Secondly, once the interest-only period expires, the debt service increases, which reduces cash flow. Lastly, a borrower may convince themselves to do a bad deal because of the lowered debt service during the interest-only period.

Debt-service coverage ratio (DSCR) is a ratio of net operating income to debt service.

This is one of the factors the lender will use to calculate the maximum loan amount.

Loan-to-value (LTV) is the ratio of the loan amount to the appraised value of the apartment community. All lenders will provide financing up to a maximum percentage of the appraised value.   

The higher the LTV, the more leveraged the deal. This is beneficial because of the lower down payment but is also riskier since a borrower has less equity in the deal as a protective cushion against market fluctuations. Therefore, don’t secure a loan with an LTV that is greater than 85%.

Interest rate is the rate the lender charges a borrower to borrow their money. The interest rate is either fixed, meaning it will remain unchanged during the loan term, or is floating, which means it fluctuates up and down during the loan term. Generally, the initial interest rate is lower when floating. But it doesn’t mean it will remain lower.

If the interest rate is floating, a borrower will want to know what the rate is tied to, which is referred to as the index. Then, they can see how the index is trending to determine if your interest rate will go up or down during the hold period (to the best of their knowledge, of course)

If the interest rate is floating, a borrower may also want to consider purchasing an interest rate cap. For an upfront fee, they can place a ceiling on how high the interest rate can rise. This is always ideal since it is impossible to predict whether interest rates will rise or fall during the hold period.

Whether the interest rate is fixed or floating, a borrower will also want to know when the rate is locked in. If interest rates are raising, they want to rate to lock as quickly as possible. Sometimes, a borrower has the option to expedite the rate lock period for a fee.

Click here to learn more about fixed rate vs. floating rate interest rates.

Recourse determines if the guarantor is personally liable for the loan. If the loan is recourse, the guarantor is personally liable. If the loan is non-recourse, the guarantor is not personally liable.

If the loan is non-recourse, a borrower will want to determine what the exemptions are that converts the loan to recourse, which are typically fraud, misrepresentation, and gross negligence.

Tax and insurance escrows: a borrower may be required to submit monthly deposits into a tax and insurance escrow account, even if taxes and insurance payments are due quarterly or annually. If monthly escrow deposits aren’t required, they may need to raise extra money upfront to cover lumpsum tax/insurance payments, depending on how quickly each is due after closing

Lender reserves is the amount of money the lender requires each month to be deposited in a reserves account. Usually, lenders require between $200 and $300 per unit per year.

Besides the deposit amount required, a borrower also wants to know when they stop making deposits and when they can pull the money out if it isn’t used.

For agency loans, expect to continue to make the payments until payoff the loan. Also, don’t expect to be able to access the funds until payoff of the loan either. For non-agency loans, the lender reserves are usually negotiable.

Prepayment penalties is a fee incurred if a borrower pays back the full or a certain percentage of the loan amount before a specified date.

The prepayment penalties are important if they expect to refinance or sell before the prepayment period expires. If this is the case, they will need to include the prepayment expense into your sales disposition calculations.

Click here to learn more about prepayment penalties.

Assumable: if the loan is assumable, when you are ready to sell the deal, a prospective buyer has the option to either secure new debt at new terms or assume the existing debt at the existing terms. This is attractive to buyers if the existing terms are better than the new terms currently available.

Typically, there is a fee incurred to the buyer who assumes the loan.

Supplemental loans: these are secondary loans taken out on top of the existing mortgage. If a borrower is allowed to secure a supplemental loan, they will want to know how many they can secure and when they can be secured. Generally, they are able to secure a supplemental loan one year after the origination of the first loan.

Click here to learn more about supplemental loans.

Require reports: the lender will order reports to be conducted on the property. These generally include an appraisal, property condition assessment, and phase I environmental, at minimum. A borrower will want to know which reports are required, when they are due, and the costs associated with each.

Click here to learn more about the different due diligence reports.

Financing fees: these are the fees charged by the lender (or mortgage broker) to put together a loan. Common fees are applications fees, processing fees, origination fees, good faith deposits, and interest rate lock fees.

Want to learn more about commercial real estate lending and multifamily financing?

Click here to download a FREE document with more detailed information on the different types of agency loans, bridge loans, and multifamily financing options,

Also, click here for more blog posts on apartment financing and lending.

 

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large high rise apartment complex near the ocean

Four Tactics to Buy a Large Commercial Property as Your First Investment

Investing in your first property can be a nerve racking experience. Whether you’re house hacking a duplex, rehabbing and renting a single-family, or buying a turnkey four-unit property, the novelty and your lack of experience will make for an interesting yet exciting first couple of months, or even years.

 

Regardless, most real estate investors start small and either remain that way or gradually progress to larger and larger projects. Brian Murray, who owns over $40 million in apartments and other commercial assets, took the exact opposite approach. Rather than start with a single-family, a four-unit, or even a 20-unit, his first investment was a 50,000-square foot office building.

 

In our recent conversation, Brian explained four reasons why he was able to successfully start his career with such a large commercial property investment and why you can do the same, regardless of your base skill set.

#1 – Creative Financing: Assume the Loan

In 2007, Brian purchased a 50,000-square foot office building for $836,000, which was his first investment. Since Brian is a go-getter, not only did he go straight for a large property, but he went for a large AND distressed property. “It was in pretty bad distress,” Brian said. “It was less than half occupied. It was not well maintained, but it was very well located.”

 

Being Brian’s first property, he didn’t have much money and had no prior real estate experience. As a result, he was rejected from the banks and was unable to secure a loan to buy commercial property. But that didn’t stop him. Using creative financing, he was able to get the deal done by assuming the seller’s existing mortgage, which was $730,000.

 

Related: Pay Attention to These Five Loan Components to Maximize Your Apartment Returns

#2 – Credits for Deferred Maintenance and Discrepancies

For an extra level of creativity, Brian was also able to negotiate credits for deferred maintenance. “One of the things I negotiated was to get credit at closing equal to the value of their reserve replacement,” Brian explained. “They had a couple of other reserve accounts with the bank that I was able to negotiate credits at closing in that amount.”

 

With the combination of assuming the mortgage and getting credits from the seller, Brian was able to take over the building with very little cash out-of-pocket for this large commercial property investment.

 

However, Brian didn’t stop there. During the due diligence phase, he uncovered discrepancies between what the contract and leases said and what he actually saw at the property. For example, “one of the things that was wrong was the rent roll. There were tenants on the rent roll that just plain didn’t exist. There were spaces that the rent roll had indicated were occupied that, when I went and actually physically toured the property, I realized they were actually vacant.” Brian was able to get more credit from the seller for things that he discovered during the phase. He said, “It all worked out to keep that initial amount of cash [out-of-pocket] fairly limited.”

 

This anecdote supports the best ever advice of always doing your due diligence, especially when you’re about to buy commercial property to develop and sell for a profit.

#3 – Pay Attention to Decrease Expenses

One of the main reasons why this commercial property investment was so successful is because Brian was able to quickly decrease excessive expenses and make the building cash flow positive after year one. The two main expenses he cut were the utilities and the salary of the building’s superintendent, which he accomplished in one fell swoop.

 

At the time of purchase, the property had one employee – a superintendent. The superintendent was responsible for coming in early, opening up, and prepping the space. “That means,” Brian described, “unlocking the door, turning the lights on, checking the bathrooms, doing a walkthrough, and then just general maintenance in terms of landscaping [and] cleaning.” In this particular case, Brian discovered that the current superintendent wasn’t doing a whole lot. In fact, he had a woodshop set up and was doing side work during the workday! “The owners were from outside the area and weren’t keeping an eye on it, [so] the place looked terrible. There was trash all over in the front yard [and] there was no landscaping to speak of. It had really been let go.”

 

On top of that, the superintendent wasn’t controlling the heating and cooling system. “He literally would crank the air conditioner on high 24/7,” stated Brian. “If the tenants were too cold, they had to open their windows and let some warm air in.” In the fall, the superintendent would do the same with the heat. In short, money was literally being pumped out the window every day!

 

On Brian’s first day of ownership, he confronted the superintendent. “I asked him how to control the thermostat, and he said, ‘there’s no way to adjust it. It’s locked.’ I said, ‘you can’t tell me how to control the temperature?’ and he said, ‘no, I don’t know how.’ So that was his first and last day in my ownership.” Brian called the thermostat manufacturer and they walked him through how to unlock and program the thermostat.

 

After relieving the superintendent of his duties, Brian saw a substantial decrease in expenses for his commercial property investment. “I was able to program [the thermostat] so it turned down at night [and] turned down on weekends. By keeping a close eye on that, I cut the utilities bill in half in the first year. By cutting the salary of a superintendent [and] by cutting my energy bills in half right out of the gate, the building turned cash flow positive.”

 

Related: Four Strategies to Reduce Your Largest Business Expense – TAXES

#4 – Reinvest Profits to Boost Property Value

After decreasing his expenses by cutting both his utility bill and superintendent’s salary and turning the property cash flow positive, Brian didn’t pocket the extra cash. Rather, he reinvested it right back into the property. “That’s another thing I stay true to to this day: I always plow the vast majority of the money back into the properties and keep reinvesting back in. That’s a part of how you build value.”

 

With the decrease in expenses and reinvestment back into the building, the “property’s probably worth $3 million.” That’s more than triple the original purchase price of $836,000!

 

Related: The Four Overlooked Benefits of Real Estate Investing

Conclusion

Brian’s Best Ever advice is to “think big. Don’t be deterred … Don’t be intimidated by those biggest properties.” He said, “I think people are intimidated by the larger properties, but they really shouldn’t be because, the bigger you go, the more flexibility there is in how you can finance it. There’s a lot more opportunity that opens up to you.”

 

This advice manifested from Brian’s first ever real estate purchase – the 50,000 square foot office building. During this with commercial property investment, he learned:

 

  1. Creative financing techniques to buy commercial property with little to no money out-of-pocket when you can’t secure a loan from a bank
  2. To negotiate to get credits from the seller for deferred maintenance
  3. To check contracts and leases against what’s actually happening at the property, and negotiate credits if you find any discrepancies
  4. How to investigate to find ways decrease expenses
  5. Reinvesting profits back into the property is how you quickly build your net worth

 

After applying these lessons, Brian’s more than tripled the value of his first property, and he was able to expand from one property and zero employees to 30 properties and 16 employees in less than 10 years. If you’re interested in commercial property investment, particularly apartment syndications, consider investing with me, Joe Fairless. Just complete this form, and I’ll contact you if you’re a fit for my next investment opportunity.

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How To Analyze New Construction Deals

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New construction expert Chris Somers goes into key points when his clients are looking at new construction.

  • There is a lot of upside as well as potential risk involved.
  • Investors can make boat loads of money if they make the right decisions on where to buy and what to build.
  • The execution on the project is crucial as the dollar signs are usually much larger than your average flip.
  • The margin of error is much smaller than on a flip so the planning and overall strategy need to extremely accurate.

 

Content by: Ian Walsh, Hard Money Bankers LLC

 

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How a Billion Dollar Real Estate Developer Qualifies a Deal

Mark Mascia, who has 12 years of experience in real estate developing residential units, retail and mixed-use properties, and office space with a total portfolio value approaching $2 billion, is one of many speakers who will be presenting at the 1st annual Best Real Estate Investing Advice Ever Conference in Denver, CO February 24th to 25th.

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In a conversation with Mark all the way back in 2015 , he provided his Best Ever advice, which is a sneak preview of the information he will be presenting at the Best Ever conference.

What was Mark’s advice? He explained the most effective way to qualify a development deal.

 

How To Best Qualify a Development Deal

 

The main way Mark qualifies an individual development deal is to determine if it fits his company’s long-term criteria. He determines the “likely scenario” and the “worst-case scenario.” He wants to be comfortable that even the worst-case scenario still meets the investment objectives.

Advice in Action – For a development deal, as with real estate investing in general, so many things can go right, but so many things can go wrong, too. Some issues you have control over and some you don’t, says Mark. You really have to protect yourself by setting the tone with the worst-case scenario and making sure that it is something you are happy with before you start.

By determining the “likely” and “worst-case” scenarios, Mark typically reaches out to the team in the specific market, not just to verify that the deal source is credible – by performing background checks and checking all references – but also to learn more about the market.

Each individual market is the same in a lot of respects – they are in America, so there will be a lot of the same brands, people, and demographics. However, each market is much nuanced with government restrictions, incentives, and other important factors differing from market to market. Mark always starts with a due diligence team of local professionals who have done at least three projects in a similar market. He then brings them to the table to ask them the important questions. While Mark and his team are the experts in the development process, they aren’t experts in an unfamiliar individual market.

If they don’t have a direct connection or can’t find an expert in a specific market, Mark’s group won’t invest. The benefit of having this nationwide investment approach is that they can be very selective and don’t have to do every deal that meets their criteria. Most of what they look for is a diamond in the rough, says Mark, so they look at an immense number of deals to find the few that work for them.

Advice in Action – The key to finding local experts is networking. Everything in Mark’s business is about networking. You would be surprised that even on a national basis that the real estate industry is quite small. There are many people, but it is a small world, so everyone is two or three degrees of separation from the person you need to meet. There are many national organizations where Mark knows a lot of people who also know people in the local markets in which he invests.

Mark will go through those avenues to find local people that his friends or people he has worked with in the past can refer. If that fails, Mark looks at permits that are being pulled in the local area and reaches out to the individuals involved with those properties.

By networking, you aren’t paying to learn, explains Mark. The people you meet have already learned everything and have made all the mistakes that need to be made in order to move forward. Your goal should be to leverage their experience the best you can.

Conclusion

 

The main way Mark qualifies a deal is to determine the “likely scenario” and the “work case scenario” and see if both outcomes fit into his long-term investment criteria. If he isn’t comfortable that both scenarios will meet is investment objectives, he won’t invest.

To determine these scenarios, Mark relies heavily on his boots-on-the-ground team members in the local market. If he doesn’t have a direct connection or can’t find an expert in a specific market, he won’t invest.

 

 

Want to learn more about real estate development, as well as information on a wide range of other real estate niches? Attend the 1st Annual Best Ever Conference February 24-25 in Denver, CO. It’s the only real estate investing conference whose content and speakers are curated based on the expressed needs of the audience. Visit www.besteverconference.com to learn more!

 

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Joe Fairless