What is a Real Estate Developer?
Before a prospective homeowner buys a property or a company leases a commercial building, land must be developed. Real estate development is a comprehensive process that involves purchasing land, financing the project, building a structure, and managing each stage of development.
Among the most important roles in the industry is that of a real estate developer. They acquire and develop properties into residential or commercial buildings. Everything from retail spaces and industrial buildings to single-family homes and apartment complexes must be overseen by a real estate developer.
Real estate developers can be involved in the entire development process, which begins with the acquisition of land and ends with selling the finished property. They can also help with renovation and re-lease projects. This guide explores real estate development and answers the question “What is a real estate developer?”
Role and Responsibilities of Real Estate Developers
It’s possible for real estate developers to only handle a portion of the development process. However, most professionals manage the entire process, which begins by identifying the right opportunities.
Identification of Opportunities: Developers are tasked with performing comprehensive research to ensure they select the proper site for the construction project. Site selection involves everything from finding raw land to determining its overall feasibility.
While research and analysis can help a developer learn more about a site’s potential, they need to make a certain amount of speculation. Their goal is to identify a site that can meet their needs.
Planning: Once the real estate developer purchases the land, they’ll need to plan the entire project with direct involvement from the investor. During this process, the developer will hire contractors, architects, and designers. They’ll work alongside the investor to identify the scope of the project as well as its goals.
This stage of the process may also involve estimating construction costs. While it’s challenging to account for eventual construction expenses, the developer will work with the contractor to compile cost estimates.
Financing: Before construction can get underway, the developer must secure funding for the project. Financing a standard development project isn’t the same as applying for a mortgage. Since development is somewhat speculative, the terms of any financing that’s approved are based on project details and potential risks.
Keep in mind that financing for this type of project can come from joint ventures, hard money loans, traditional funding, equity placements, syndicated financing, and cash. Developers with more experience may have an easier time securing financing.
Construction: Developers also oversee the entire building process. During this phase of a project, the developer will provide project management to ensure everything goes according to plan. The construction process can involve the following steps:
- Preparing the site
- Construction staking
- Grading
- Erosion control
- Stormwater collection
- Installation of on-site utilities
- Foundation placement
- Landscaping
- Construction of building
- Interior buildout
Marketing and Selling: After the building has been constructed, the developer will likely stick around to sell the completed property on behalf of the investor. During this process, developers are required to promote the property, which means getting the word out, taking high-quality photos, and creating well-written listings.
Renovation and Re-lease: While developers often acquire land to develop new properties, they can also work with existing buildings. If an owner needs to perform a major renovation or re-lease project, a real estate developer can manage it.
Career Paths in Real Estate Development
If you wish to become a real estate developer, there are several career paths you can take. The jobs you gain access to are based on your level of experience. If you start as a real estate agent, you should eventually earn enough experience to pursue a career as a developer.
People with a construction background can also transition to real estate development. If you work your way up to being a construction manager, you’ll likely have many of the skills necessary to enter the real estate development industry. Some of the entry-level positions you can apply for to start working in this industry include the following:
- Asset management specialist
- Developer analyst
- Real estate sales associate
- Architectural designer
Eventually, you may earn enough experience to apply for the following positions:
- Real estate analyst
- Project manager
- Senior consultant
- Real estate broker
At this stage, you can likely work full-time as a real estate developer. Some of the other positions you may have enough experience for include:
- Principal product manager
- Chief risk officer
- Senior investment analyst
It’s highly recommended that you work with real estate development consultancies or companies to become more knowledgeable about everything from entitlements and site selection to zoning hearings.
The Real Estate Development Process
The development process is a lengthy and time-consuming one that real estate developers must know how to navigate. It begins with the initial research and budgeting. Finding the right piece of land requires performing site feasibility studies and making sure that there aren’t any local building codes that might conflict with the development process.
While budgeting isn’t precise at this juncture, it can provide the developer and investor with a better understanding of what the project will cost. The developer will also need to consult with the local building department to obtain approval for the project.
This process is somewhat different than applying for a building permit. The development approval process allows the developer to identify if they can proceed with construction. If the project is approved, the developer will receive an entitlement. Development approval processes can vary based on land use regulations and zoning guidelines.
Once the development receives approval, they can start working on the preliminary building designs. Larger projects may also require public hearings. Before construction begins, the developer must secure financing and finalize contracts. They need to assess the property and entitle the site before they sign a purchase agreement.
While real estate developers manage the construction process, many of the finer tasks are handled by the general contractor. However, the developer will need to apply for the necessary building permits. Once the building is complete, the developer will market it to potential buyers or tenants. The property can either be sold or leased.
Commercial vs. Residential Real Estate Development
While real estate developers can manage commercial and residential projects, there are major differences between these two types of development. Commercial construction involves creating buildings that businesses can lease or purchase. These projects focus on creating functional spaces that are safe for the public. There are many types of commercial buildings, which include everything from industrial facilities and retail centers to office buildings and healthcare properties.
Residential construction focuses entirely on creating places where people can live. The types of homes that qualify as residential buildings include multifamily residences and single-family houses.
The main difference between residential and commercial developments involves the scale and complexity of the project. For example, developers must implement solid framing to ensure that the building can withstand high foot traffic. Spacious HVAC systems and elevators may also need to be included in the design of a commercial building.
There are several cost and material differences that should be considered as well. Commercial projects cost a lot more to complete. Since commercial buildings are larger, developers will need to purchase more materials and create a lengthier development timeline.
If a business is investing in a commercial building, numerous stakeholders may become involved with the project. The developer will be required to perform additional project management to ensure that the company’s specific needs are met. While some residential projects are complex, they don’t require nearly as much time and resources as commercial developments. For example, developing a large hotel with more than 30 stories can take anywhere from two to five years.
Challenges and Risks in Real Estate Development
Many challenges and risks must be overcome during real estate development. Unless the developer is working with a preexisting building, they must know how to acquire land and construct a building without shooting past the project’s current budget.
Developers will need to navigate regulations and approval processes, which can be complicated. Building plans must adhere to local codes and zoning regulations. If the permit applications include any errors, the entire construction process can be delayed.
Keep in mind that developers also need to understand market demand, which can fluctuate easily. Once the home or commercial building is finished, the developer must sell it, which requires monitoring absorption rates.
The absorption rate at the beginning of a project might have changed considerably by the end. If homes are selling at an absorption rate that’s higher than 20%, the developer will benefit from a seller’s market. It’s also challenging to manage construction and operational costs. If any aspect of the project gets out of hand, profits can erode quickly.
Key Knowledge Areas for Real Estate Professionals
To do their jobs effectively, real estate professionals must display the following characteristics:
- Familiarity with different types of flooring, exterior materials, and windows
- Awareness of various window coverings, roofing materials, and common floor-plan concerns
- Assessing property restrictions and soil conditions
- Understanding architectural styles and costs
- Knowledge of insulation standards, pest prevention, and heating/cooling systems
- Understanding of approved materials for electrical and plumbing systems
Conclusion
Real estate developers oversee construction projects from beginning to end. They often acquire land, hire contractors, and sell the finished properties. A developer’s experience level can make a substantial difference in the outcome of a project. Before you hire a developer, you should have a thorough understanding of the development process and what it involves. Consider learning more about land acquisition, construction management, and permit approval processes.
Jason Somers, President & Founder of Crest Real Estate
With over 15 years of professional experience in the Los Angeles luxury real estate market, Jason Somers has the background, judgement and track record to provide an unparalleled level of real estate services. His widespread knowledge helps clients identify and acquire income producing properties and value-ad development opportunities.
Learn more about Jason Somers or contact us.
