Rookie Developers vs. The Real Estate Jungle

First time developers are facing several serious problems on the road to getting their first project built. 

  1. Obtaining a Construction Loan
    Why did the first-time developer apply for a construction loan? Because they thought it was time to “build” their financial future – one brick at a time!
    First-time developers often struggle to secure construction loans due to several factors:
    • Limited Liquidity: They may lack the necessary liquid assets to meet the lender’s down payment and reserve requirements, making it challenging to even qualify for a loan.
    • Inadequate Net Worth: Banks and lenders typically require developers to have a substantial net worth to serve as collateral or a guarantee for the loan. First-time developers might not meet these financial criteria.
    • Lack of Experience: Lack of prior experience in real estate development can make lenders nervous. They often prefer developers with a proven track record of completing successful projects, as this reduces their perceived risk.
  2. Attracting Institutional Equity
    Why do institutional investors hesitate to fund first-time developers? Because they’re worried the project might be a “building block” for disaster!
    Institutional investors play a crucial role in funding large-scale real estate projects. However, first-time developers encounter difficulties in this area due to:
    • Limited Experience and Track Record: Institutional investors, such as private equity firms or pension funds, often prioritize developers with a history of delivering profitable projects. First-time developers may struggle to gain the trust of these investors.
    • Risk Aversion: Institutional investors tend to be risk-averse. They may be hesitant to invest in developers who lack a track record, as they can’t assess the developer’s ability to manage the project effectively.
  3. Lacking a Professional Network
    Why did the first-time developer struggle to find a reliable architect? Because they were afraid, they might “draft” the wrong plans and end up with a house of cards!
    Building a network of professional contacts is essential in the real estate development industry. First-time developers face challenges in this regard because they:
    • Lack Industry Connections: Without prior experience in the field, they might not have established relationships with architects, contractors, engineers, or other key professionals necessary for project execution.
    • Difficulty in Choosing the Right Vendors: Lots of vendors and brokers are soliciting their services but it is difficult to select the right ones. Many first time developers are focused on choosing the least expensive vendor. The challenge is a cheap architect could end up costing the project lots of money. Same applies to a low bidder general contractor, structural engineer or finance broker. 

In summary, first-time developers encounter a trifecta of challenges: financial limitations, a lack of experience and track record, and a limited professional network. Overcoming these hurdles often requires creative financing solutions, mentorship or partnerships with experienced developers, and active networking efforts to build relationships within the industry.

Of course, the partners we work with at GIS Companies are no rookies. They are experienced business people and professionals in their own fields. However, the projects they are tackling are above and beyond what they have accomplished so far. But more on that in another post.