7 Steps on How to Become a Real Estate Developer. *AMA on RE Development*

[Ing]

@Antifragile , thanks for the thread.
I am interested on RE for decades now, but was afraid of it. Your informations clearly show, that I was right. But its so interesting!

 

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[joe3k]

I started on the finance/accounting team (Manager of Finance, Director) until eventual CFO role before founding our company. Back then I chose this path because running finance meant seeing everything and being in every meeting. Short of being the CEO, of course, it was the best place for me to see all decisions and learn all aspects of the business.

At the same time, I'd always volunteer to help other employees and unsurprisingly everyone always said yes to me doing their work! This meant I was exposed to acquiring real estate distressed assets (court), buying hospitality venues, running a dive bar, negotiating leases with tenants (i.e. reviewing Starbucks lease is an experience that's highly valuable to this day), managing tenant leases and evictions, helping sales centre staff, underwriting construction costs with estimators etc. I was everywhere because I needed to learn. That attitude kept getting me promoted. But it wore me out. I still had to do my own job tasks (like running my own team) on top of all these other tasks.

When I reflect back and do some soul searching, I feel I worked too long and too hard. Back then I was so focused on "making it" that I ate poorly and exercised very little. I literally had the financed BMW that MJ mentions in his books *facepalm*. My life wasn't much in balance, it was a total grind. On top of that I had a side hustle business with a partner. I was always reading, learning, doing side gigs to earn more money.

There is probably a better and shorter path than mine! But since you asked, I thought I'd share...

Today, I am glad I have the scars of my experience.

Very interesting, thank you for taking the time to reply.

 

[MoneyDoc]

Thanks for the amazing thread @Antifragile !

I have a TON of questions, but I'll start with the most important one.

Deal structure.

You're a new developer and you think you found the PERFECT deal (it's probably very bad...), you submit an offer, you put conditions in such as subject to due diligence, subject to zoning, subject to other entitlements, and then bam, seller (who is just a normal person that just happens to be living on a lot perfect for a 8 unit townhome re-development) wants none of your developer conditions in place.

How would you approach this? You're new so obviously you don't want to get trapped with a property that is prohibited from a certain zoning, say townhomes.

And a follow up to that would be, say you get the deal, the property is a home, so you're responsible for a mortgage. Zoning can take some time, do you lease the property? What if the lease doesn't cover the mortgage? You're in Canada so you know that making money on a rental home is very rare unless you're paying cash... For example, beautiful re-development lot in my area is going for $1.5m right now. I can probably re-zone to permit townhomes. However, maximum lease on this property is probably $3000... That won't even cover the mortgage assuming it's 20% down. Now you've paid (and have stuck) $300k for the downpayment (20%), and now you're responsible for the mortgage until you can lease the unit. Then you're responsible for the difference between the lease and the mortgage once the unit is leased. How would you approach this if you were just starting out?

 

[Antifragile]

Thanks for the amazing thread @Antifragile !

I have a TON of questions, but I'll start with the most important one.

Keep them coming!

Deal structure.

You're a new developer and you think you found the PERFECT deal (it's probably very bad...), you submit an offer, you put conditions in such as subject to due diligence, subject to zoning, subject to other entitlements, and then bam, seller (who is just a normal person that just happens to be living on a lot perfect for a 8 unit townhome re-development) wants none of your developer conditions in place.

How would you approach this? You're new so obviously you don't want to get trapped with a property that is prohibited from a certain zoning, say townhomes.

Typically in a hot market like today, you will not be successful in getting a deal "subject to rezoning". This is because rezoning will take 12+ months (my assumption, I don't know TO). Why would a vendor wait that long to transact? If they said yes, it would be the equivalent of you have the "option to buy" with only a deposit.

In our deals, our "Conditions" typically are:

• the Purchaser being satisfied in its sole discretion that there are no hazardous or toxic substances or materials on, in or about the Property;
• the Purchaser being satisfied in its sole discretion with the results of any physical inspections of the Property including, without limitation, soil tests and surveys, and the condition and state of any fixtures or improvements thereon, by such agents, consultants or other Persons as it deems necessary;
• the Purchaser being satisfied with its review of any financial information pertaining to the property;
• the Purchaser being satisfied in its sole discretion with the feasibility of its proposed acquisition and use of the Property; there not being outstanding with respect to the Property any present or future capital levies, sewer impost fees, local improvement rates, special assessments, deferred or instalment charges of a capital nature, claims for repayments of tax rebates or credits or any other similar charges;
• the Purchaser securing satisfactory financing for the proposed acquisition on terms acceptable to the Purchaser in its sole discretion

"feasibility of its proposed acquisition" is the exit if I learn anything I don't like...

And typically, I only get 30 to 90 days to do the due diligence!

How do you know if you can or cannot rezone your property from single family to multifamily (TH)? Read the current zoning, then read the OCP. What does the OCP say? Then you call city planner and ask them to help you understand their intent. What will they support for this site? What is their vision to help you understand OCP? What is the long range plan?

And a follow up to that would be, say you get the deal, the property is a home, so you're responsible for a mortgage. Zoning can take some time, do you lease the property? What if the lease doesn't cover the mortgage? You're in Canada so you know that making money on a rental home is very rare unless you're paying cash... For example, beautiful re-development lot in my area is going for $1.5m right now. I can probably re-zone to permit townhomes. However, maximum lease on this property is probably $3000... That won't even cover the mortgage assuming it's 20% down. Now you've paid (and have stuck) $300k for the downpayment (20%), and now you're responsible for the mortgage until you can lease the unit. Then you're responsible for the difference between the lease and the mortgage once the unit is leased. How would you approach this if you were just starting out?

Our acquisitions are typically larger, think an assembly of 5-10 lots like the one you described. Of course I'd want to rent them out to create some incidental income for our project. And of course it won't be enough to cover my cash outflow. That's just the reality of development - it's either "Land" or "Income Producing Property". IPP has a yield, land doesn't.

Also, typically we'd finance land with a Land Loan, which is 50% to 60% Loan to Cost loan. This loan can only be outstanding for a maximum of 2 years, would be a Prime + % interest, and payments would be interest only. Meaning, I would not get a typical "mortgage" with repayment penalties and principal payments.

The interest on the Land Loan, the Soft Costs (architect, other consultants) are all part of the Equity we would be spending on a site during the pre-construction phase, like rezoning.

Hope this helps!

 

[Doug-Parker]

This is a really interesting thread. I work in commercial real estate in the UK and I note that there seems to be a lot of commonality with the US too (save for terminology in some cases). I'm a chartered surveyor working on a contract basis for a local authority (council) and also a smaller business that advises private investors how to invest in commercial RE. I'm desperate to invest myself but I just don't have the capital it takes to start in any meaningful way at the moment. @Antifragile how did you get around this? Did you seek 100% capital funding (which is clearly high risk for any investors) or did you manage to dump a load of cash into the business to get it going?

 

[Antifragile]

This is a really interesting thread.

Thanks Doug.

I work in commercial real estate in the UK and I note that there seems to be a lot of commonality with the US too (save for terminology in some cases). I'm a chartered surveyor working on a contract basis for a local authority (council) and also a smaller business that advises private investors how to invest in commercial RE. I'm desperate to invest myself but I just don't have the capital it takes to start in any meaningful way at the moment.

This is typical. And I believe it makes our business a good space to be, it required a lot of capital (major barrier to entry) and experience.

@Antifragile how did you get around this? Did you seek 100% capital funding (which is clearly high risk for any investors) or did you manage to dump a load of cash into the business to get it going?

It is a bit of both Doug. Before founding our company, I met with a few of my key investor contacts. The question I had, would they support me by investing the majority equity position? I invested a meaningful amount for me, but I needed to syndicate the majority of equity. This is one of many reasons I stayed as employee and built some wealth first. To this day, I don't know how to start this type of business without having a decent net worth (while retaining control over your company).

I know this may sound disappointing to some people here. But then again, maybe it's not unexpected. Business is hard, and the harder it is - the more likely it is to do well for you (if you figure it out). Easy would be easy for everyone too.

Hope this helps. Thanks for the questions!

 

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[Doug-Parker]

@Antifragile , great response. Thanks for replying. That's encouraging actually and your reply confirms my belief that despite it being (sort-of) possible to begin in RE without much capital, you're in a far better position if you are. From what I've seen so far, the fact that you are honest about the requirement for capital sets you apart from many of the (self-proclamed) property 'gurus' who claim you can start with nothing. I enquired as to your view because I wanted to make sure I'm not missing an angle here.

As I mentioned, I work in commercial RE every day (this is my 2nd career) so I know I'm in a good place. I also have a business locating land and property for developers and retail tenants (this is hard work and is slow to get moving at the moment!!) I was toying with the idea of starting another business simply to generate capital to start RE investing but as Mr DeMarco says in his books - it's unwise to attempt to build more than a single business at a time.

 

[Antifragile]

@Antifragile , great response. Thanks for replying. That's encouraging actually and your reply confirms my belief that despite it being (sort-of) possible to begin in RE without much capital, you're in a far better position if you are. From what I've seen so far, the fact that you are honest about the requirement for capital sets you apart from many of the (self-proclamed) property 'gurus' who claim you can start with nothing. I enquired as to your view because I wanted to make sure I'm not missing an angle here.

The difference between me and the "gurus" is that I am not selling anyone a course. I am just sharing what I learned.

There is an angle that could work - to become a development consultant company. Meaning, you'd not own any of the projects or have any actual control over how you develop, but you could charge fees to help out new developers (those with money but no experience). The catch-22 here is having experience to be able to charge fees for your services. To get experience, nothing beats having skin in the game and making some mistakes first. Catch-22: those who have experience probably have some money, and those who are starting out don't have experience to charge fees to earn money.

Many developers came from construction, first made their money as a general contractor and then entered development. Others came from an exit from another business. In a way they are "hobby developers" who have money and can afford to learn along the way.

As I mentioned, I work in commercial RE every day (this is my 2nd career) so I know I'm in a good place. I also have a business locating land and property for developers and retail tenants (this is hard work and is slow to get moving at the moment!!) I was toying with the idea of starting another business simply to generate capital to start RE investing but as Mr DeMarco says in his books - it's unwise to attempt to build more than a single business at a time.

MJ is right - focus on one thing and generate as much profit as you can. It's impossible to be excellent at many things. Focus tends to pay better.

 

[Antifragile]

The other day I had breakfast with a friend who is thinking of setting up a fund. He's been an employee in the industry for quite some time. But of course, once you go on your own all kinds of new questions come up.

In particular the question on how rewards travel between investors and developers, how to structure the GP/LP waterfall and promotes. What is typical? I thought this may be interesting to the readers of this thread too. So here we go...


How Developers make money.

In order to understand how developers make money, it is important to first understand the typical organizational structures used in real estate development. The most common structure is the general partner (GP)/limited partner (LP) structure. In this type of arrangement, the GP is typically responsible for the day-to-day management of the project, while the LP provides the capital.

The LP is usually entitled to a preferred return, which is a fixed percentage of the total investment that is paid out before the GP receives any distribution. The GP is typically also entitled to a promote, which is a portion of the profits above the preferred return that is paid to the GP.

Another common arrangement is the waterfall structure. In this type of arrangement, the investors are typically paid back their initial investment first, followed by a preferred return. Once the investors have received their initial investment plus the preferred return, any remaining profits are then split between the GP and LP according to the terms of the agreement.

Ultimately, how developers make money depends on the specific terms of their arrangement with the investors. However, in general, developers make money by either receiving a promote or by sharing in the profits of the project once the investors have been paid back their initial investment plus the preferred return.


For example:

Assume that capital in the LP comes from:
20% - Developer
80% - Investors

Preferred return - 8%
Promote - 25%

What does this mean?

This means that if the project generates profits in excess of 8% p.a. to the investors, then for any amount of profit above the 8%, Developer gets 25% as "promote".

Most projects should generate anywhere form 20% to 25% IRR. This means that in my example above, Developer puts in 20% of equity, but when the profits are split, Developer ends up having 30%+ of all returns, because of the "promote" described above.

Put it another way, for every $100 investor puts in, 3 years later they should get $165 and the developer for every $100 put in would get $205 or more. That's assuming a 20 to 25% IRR. If the project is supremely successful, and the IRR gets higher, then the developer continues making disproportionately more than the investors in terms of investor multiple.

This is why it makes a lot of sense to syndicate your equity.

Hope you find this useful.

[edit] P.S. PE firms buying and selling businesses have similar structures.

 

[Antifragile]

@MJ DeMarco, I noticed this thread became "GOLD", I assume you did that. Thank you very much!

 

[Doug-Parker]

@Antifragile this is really intresting and it's so great you're sharing this knowledge. I'm aware of the waterfall structure for returns but haven't ever really 'up close' to it (I'm more asset management/investment than development). Can I ask what your usual exit strategy is? Do you go on to manage the properties or do you sell to an investment company to recoup your outlay and settle up with investors?

 

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[Antifragile]

@Antifragile this is really intresting and it's so great you're sharing this knowledge. I'm aware of the waterfall structure for returns but haven't ever really 'up close' to it (I'm more asset management/investment than development). Can I ask what your usual exit strategy is? Do you go on to manage the properties or do you sell to an investment company to recoup your outlay and settle up with investors?

Until recently, we were 100% merchant developer. Meaning that every project went -> Acquisition -> Development/Construction -> Sale to an operator/owner. The GP/LP structure and the "promote" payouts make it lucrative to keep selling and transacting. But as we get a little bigger and take on larger projects, we are now retaining parts that make sense. For example, as soon as my passive income from a development site reaches 15% annual returns for holding - we are no longer willing to sell. This means no exit for 10-20 years? Who knows. The way to settle this with our investors is to either buy them out (re-financing) or offer them to stay with us (renegotiate LP Agreement).

The world is full of uncertainty these days. Interest rates are rising, war Ukraine/Russia, supply chain issues, Covid lockdowns (Shanghai) etc. It's very hard to decide what to do with these many inputs in our industry. As such, my answers will probably change week to week if you ask me again on our "exit". For example, we have one industrial property that we designed but did not yet develop and are listing for sale. That's because approvals process is done but building in this environment is risky (hard costs). Typically we never sell land, because if we do, we should be looking to buy more land. This is a strange time when we are doing both! We sell land "shovel ready" yet at the same time are buying new land that needs rezoning, servicing, approvals etc.

 

[SC87Dominik]

This is my interpretation:

whoever owns the title to the land + gets regulatory/zoning approval + contractors + investors approval + all other stakeholders (legal/finance/construction/architects/engineers...whoever it may be...)+ buyer's approval = you get to build something and someone will pay you.

In this equation, where the heck is there value skew? No offence, I'm just curious because I want to finally settle this debate for my own piece of mind.

My brain for some reason doesn't like how simple it is. Maybe you could change my mind and convince me how great it is?

 

[Antifragile]

This is my interpretation:

whoever owns the title to the land + gets regulatory/zoning approval + contractors + investors approval + all other stakeholders (legal/finance/construction/architects/engineers...whoever it may be...)+ buyer's approval = you get to build something and someone will pay you.

In this equation, where the heck is there value skew? No offence, I'm just curious because I want to finally settle this debate for my own piece of mind.

My brain for some reason doesn't like how simple it is. Maybe you could change my mind and convince me how great it is?

What an amazing question, thanks for asking. I like it because it gets to the heart of entrepreneurship - value. What do developers do? In the end, the formula above you posted isn't wrong: buy land ->rezone -> design and develop -> build -> market it ->sell and then repeat. Where is the value skew? Shouldn't anyone be able to do this?

Your brain thinking it is simple is how I got into the business. I wish I was kidding! I was looking for a market where I knew exactly how to make money and could only focus on execution. I didn't want to be spending years inventing something brand new and failing. It felt like real estate was buy/build/sell repeat.

Years later here I am ... thinking it is the most complex business in the world. I can't imagine anything more complicated than what we do. Every site is different, every municipality has different zones, interpretation of uses, allowable height, width, shading by-laws, view corridors and step code requirements (plus 1,000 other things). Same with asset classes, developing Office has little to nothing in common with purpose built Rental! Even the way you calculate your efficiency in the building, or how you approach leases (renters) is totally different too. Worse yet, approvals take so long that we often buy in one market and end up having product in a different market!

Where is the value skew? That's the question I ask myself every time before buying a property. That's my risk and my business, if I do not bring value - no one will buy and I will lose money. But unlike Amazon listed widgets, I can't do test runs, I am committing millions to each deal. And if there is value and everyone else is doing the same, then our product becomes a commodity and we again have a problem - absorption of inventory into sales.

This is why I study economics, finance (reading Ray Dalio, Howard Marks etc), marketing, legal, and our staff are architects, project managers (PMP), MBAs, CFAs etc. We are trying to control chaos! We build systems, checklists, relationships with consultants to ensure we can deliver projects on time and on budget.

Our value skew is 300 good decisions to deliver a product that our buyers will enjoy. If you rent from our latest building, it's set up for a nook for working from home, and the kitchen counter is oversized hang to allow to work on a laptop there too. We have rounded corners for all fixed countertops. Our value skew is that if you have kids, you don't need to baby proof sharp corners!

Hope this helps

 

[Antifragile]

We closed on another property yesterday. It will be a mixed use project, commercial at grade and condos above.

I am choosing to put it here as a general statement because of the reason for this particular acquisition. It’s location and cost base. The land cost base is low enough to make a good profit. But more importantly, the location is amazing. Within walking distance for a family with a stroller, there is a park with water features and a Japanese garden. It’s stunning beyond what I am capable of putting into words. And directly across the street, there is a golf club. It’s also a 10 min drive to downtown (for those buyers who work downtown that can be very appealing).

I believe it is our business to deliver what people need. These days affording RE is hard, so we are forced to go further away from the downtown core. Yet when we do that, there are choices. Some locations are just OK. In those instances, the condos we sell become just a commodity and we compete on price. I do not like this and do not recommend this. Commodity product means very low margins (or no margins at all!). Instead, we need something that differentiates our product. That typically in RE starts with location and ends with design. Location cannot be replicated by our competition. Design can, but if we do a great job and articulate the comfort of living in our building, people will pay a premium.

 

[FastNAwesome]

@Antifragile sorry to bump the thread, was always curious - what are some benefits/reasons to go with 3rd party for sales/marketing?

I live right next to a developer/investor, and he sells out apartments (directly to end buyers) before they're even finished. Plenty of other offerings also advertise "buy directly from investor".

On the other hand, I do see lots of properties marketed by 3rd party companies too.

What gives?

 

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[Antifragile]

@Antifragile sorry to bump the thread, was always curious - what are some benefits/reasons to go with 3rd party for sales/marketing?

I live right next to a developer/investor, and he sells out apartments (directly to end buyers) before they're even finished. Plenty of other offerings also advertise "buy directly from investor".

On the other hand, I do see lots of properties marketed by 3rd party companies too.

What gives?

No, no - thank you for bumping my thread! When you do that and ask questions, I feel validated as if I am adding some little value to the readers. Otherwise, it's like playing tennis with a curtain! Ha-ha.

Back to your question...

Developers aren't all created equal. Some begin with deep pockets from another business. Others start as a single family builder and grow into multi-family with decades of growth. Some believe that full vertical integration is key to success and bring under one roof both:
- Construction, and
- Marketing and Sales

Others think like a Toyota - focus on great relationships and nurture them to get best results. There is no one simple answer to your question.

My decision to outsource sales is simple: I believe we achieve better results by having a professional sales team run the process. I used to work for a developer who did sales in-house and that memory influenced my decision to do the opposite .

Does this help? Or did you mean something different by your question?

 

[FastNAwesome]

Does this help? Or did you mean something different by your question?

Thank you! Yes, it helps. Still far from being an investor either way, but really wanted to ask this.

 

[Chitown]

@Antifragile Great thread!

When starting out how did you build banking relationships? Which particular NAICS code did you use when opening business bank acounts? Were LOC extended to you once your business model was proven profitable?

Thanks in advance and, again, great thread. I've learned a ton.

 

[Antifragile]

@Antifragile Great thread!

When starting out how did you build banking relationships? Which particular NAICS code did you use when opening business bank acounts? Were LOC extended to you once your business model was proven profitable?

Thanks in advance and, again, great thread. I've learned a ton.

Thanks! Glad you found the posts valuable and happy to assist with questions.

Banking relationships.

If I could pick one area where costs can be best controlled, it has to be banking. What most people don't realize is that real estate developers leverage to the maximum amounts possible. Typically trying to reduce equity to as close to zero as possible.

My relationships with banks are ongoing and started by me having a job in the industry. It turned out that my ability to negotiate loans was excellent and as an employee, I did a lot of that. I've lost count. I first learned how lenders thought and what they needed before becoming a business owner. Then I designed our structures to match those objectives as best as one could. In short, I didn't start from ground zero.

I cannot remember which NAICS code we use (my staff prepare the paperwork and I haven't touched it in close to a decade, it is just a repeat every time we open an account). And no, we never got any LOCs to the business and still do not. Each project is a brand new structure, with its own loan and LOCs. We do provide guarantees for loans from the "mothership" when needed.

Hope this helps.

 

[Chitown]

Thanks! Glad you found the posts valuable and happy to assist with questions.

Banking relationships.

If I could pick one area where costs can be best controlled, it has to be banking. What most people don't realize is that real estate developers leverage to the maximum amounts possible. Typically trying to reduce equity to as close to zero as possible.

My relationships with banks are ongoing and started by me having a job in the industry. It turned out that my ability to negotiate loans was excellent and as an employee, I did a lot of that. I've lost count. I first learned how lenders thought and what they needed before becoming a business owner. Then I designed our structures to match those objectives as best as one could. In short, I didn't start from ground zero.

I cannot remember which NAICS code we use (my staff prepare the paperwork and I haven't touched it in close to a decade, it is just a repeat every time we open an account). And no, we never got any LOCs to the business and still do not. Each project is a brand new structure, with its own loan and LOCs. We do provide guarantees for loans from the "mothership" when needed.

Hope this helps.

It does help. Thank you.

With regard to the bankers are you dealing with money center banks, strong regionals or community banks? Also, how much face time are you putting in with them? Dinners, lunches, golfing, etc?

Thanks in advance.

 

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[Antifragile]

With regard to the bankers are you dealing with money center banks, strong regionals or community banks? Also, how much face time are you putting in with them? Dinners, lunches, golfing, etc?

Thanks in advance.

Note that I (and my business) is based on Canada, not the USA. But I've financed deals in San Diego about a decade ago and know a little about the USA banking.

What you consider Community Banks are called Credit Unions here. And they have been my main source of great deals. They are excellent at the beginning, when deals are smaller. But with scale, we run into problems with their limits (they have lower caps on how much they can lend to any one borrower). At that point, we typically can allow them to syndicate deals and do more business. Eventually, all roads lead to national "tier 1" banks.

My behaviour is not typical in many respects, and one of the "weird" things about me is that I don't do "dazzle you with dinners and golf" to get a deal done. Unlike most, I spend surprisingly little time with my lenders. Typically, my key guys maybe get 1 to 3 meetings a year! We may go to a nice restaurant, but that's about it. We'll also run into each other (pre-pandemic and now again) at various real estate events. My reputation is that I'm a man of my word and will tell you what it takes to do deals with us. It's not snobby, it just saves people time. I think bankers want to do business and if I make it easy for them to get approvals from their credit department, they will not miss any lunches with me, they'll be happy. How do you make their lives easy? Preparation. Our financing packages are very detailed, we are aggressive in our asks but within reason. Everything you banker needs to get it explained to credit is available at his/her fingertips.

Again, my approach is not typical and maybe I am doing it all wrong and missing out on something better. But I am who I am, it has worked very well for me over the years.

Side story: for the property in San Diego, I knew no one. I was from Canada and needed a land loan. And I didn't feel like flying out there to find a lender, technology (even 10 years ago) was already good enough to find a solution over internet. Google was my friend. I called over 80 people, asked receptionists! for new bank names and introductions, received almost exclusively a "no, we can't do it because you are in Canada and have no assets in the USA, we can't cross the border" answer. The funny thing about life... and @Kak told that to @thechosen1 ... with enough push, something always works out. I collected over 20 lenders, whom I called back (annoying yes, useful? Yes again.) Finally one guy took pity on me and introduced me to a retired financing broker. That broker felt my pain, he could tell I'm now close to 100 phone calls in... He said "I'll do you a favour, there are only three lenders who can do it and I'll introduce you to people who can make it happen". He did just that. I used his name as a springboard to get my loan and in the end got two LOIs. Only one was feasible but that was enough and terms were excellent (market).

I share this story because it describes me and my approach. I don't believe that pampering someone with golf is my thing. I want you to work with me for other reasons. Main reason - because it is good for you! Because my grit should give you comfort in my commitment to repaying your loans. I am sure @SteveO can share his experiences and confirm that lenders primarily want to know they are lending to good people. "Buying" loyalty can work, but it also attracts the wrong kind of lenders.

 

[Chitown]

Note that I (and my business) is based on Canada, not the USA. But I've financed deals in San Diego about a decade ago and know a little about the USA banking.

What you consider Community Banks are called Credit Unions here. And they have been my main source of great deals. They are excellent at the beginning, when deals are smaller. But with scale, we run into problems with their limits (they have lower caps on how much they can lend to any one borrower). At that point, we typically can allow them to syndicate deals and do more business. Eventually, all roads lead to national "tier 1" banks.

My behaviour is not typical in many respects, and one of the "weird" things about me is that I don't do "dazzle you with dinners and golf" to get a deal done. Unlike most, I spend surprisingly little time with my lenders. Typically, my key guys maybe get 1 to 3 meetings a year! We may go to a nice restaurant, but that's about it. We'll also run into each other (pre-pandemic and now again) at various real estate events. My reputation is that I'm a man of my word and will tell you what it takes to do deals with us. It's not snobby, it just saves people time. I think bankers want to do business and if I make it easy for them to get approvals from their credit department, they will not miss any lunches with me, they'll be happy. How do you make their lives easy? Preparation. Our financing packages are very detailed, we are aggressive in our asks but within reason. Everything you banker needs to get it explained to credit is available at his/her fingertips.

Again, my approach is not typical and maybe I am doing it all wrong and missing out on something better. But I am who I am, it has worked very well for me over the years.

Side story: for the property in San Diego, I knew no one. I was from Canada and needed a land loan. And I didn't feel like flying out there to find a lender, technology (even 10 years ago) was already good enough to find a solution over internet. Google was my friend. I called over 80 people, asked receptionists! for new bank names and introductions, received almost exclusively a "no, we can't do it because you are in Canada and have no assets in the USA, we can't cross the border" answer. The funny thing about life... and @Kak told that to @thechosen1 ... with enough push, something always works out. I collected over 20 lenders, whom I called back (annoying yes, useful? Yes again.) Finally one guy took pity on me and introduced me to a retired financing broker. That broker felt my pain, he could tell I'm now close to 100 phone calls in... He said "I'll do you a favour, there are only three lenders who can do it and I'll introduce you to people who can make it happen". He did just that. I used his name as a springboard to get my loan and in the end got two LOIs. Only one was feasible but that was enough and terms were excellent (market).

I share this story because it describes me and my approach. I don't believe that pampering someone with golf is my thing. I want you to work with me for other reasons. Main reason - because it is good for you! Because my grit should give you comfort in my commitment to repaying your loans. I am sure @SteveO can share his experiences and confirm that lenders primarily want to know they are lending to good people. "Buying" loyalty can work, but it also attracts the wrong kind of lenders.

Solid insight. Thank you!

 

[Guest-5ty5s4]

Note that I (and my business) is based on Canada, not the USA. But I've financed deals in San Diego about a decade ago and know a little about the USA banking.

What you consider Community Banks are called Credit Unions here. And they have been my main source of great deals. They are excellent at the beginning, when deals are smaller. But with scale, we run into problems with their limits (they have lower caps on how much they can lend to any one borrower). At that point, we typically can allow them to syndicate deals and do more business. Eventually, all roads lead to national "tier 1" banks.

My behaviour is not typical in many respects, and one of the "weird" things about me is that I don't do "dazzle you with dinners and golf" to get a deal done. Unlike most, I spend surprisingly little time with my lenders. Typically, my key guys maybe get 1 to 3 meetings a year! We may go to a nice restaurant, but that's about it. We'll also run into each other (pre-pandemic and now again) at various real estate events. My reputation is that I'm a man of my word and will tell you what it takes to do deals with us. It's not snobby, it just saves people time. I think bankers want to do business and if I make it easy for them to get approvals from their credit department, they will not miss any lunches with me, they'll be happy. How do you make their lives easy? Preparation. Our financing packages are very detailed, we are aggressive in our asks but within reason. Everything you banker needs to get it explained to credit is available at his/her fingertips.

Again, my approach is not typical and maybe I am doing it all wrong and missing out on something better. But I am who I am, it has worked very well for me over the years.

Side story: for the property in San Diego, I knew no one. I was from Canada and needed a land loan. And I didn't feel like flying out there to find a lender, technology (even 10 years ago) was already good enough to find a solution over internet. Google was my friend. I called over 80 people, asked receptionists! for new bank names and introductions, received almost exclusively a "no, we can't do it because you are in Canada and have no assets in the USA, we can't cross the border" answer. The funny thing about life... and @Kak told that to @thechosen1 ... with enough push, something always works out. I collected over 20 lenders, whom I called back (annoying yes, useful? Yes again.) Finally one guy took pity on me and introduced me to a retired financing broker. That broker felt my pain, he could tell I'm now close to 100 phone calls in... He said "I'll do you a favour, there are only three lenders who can do it and I'll introduce you to people who can make it happen". He did just that. I used his name as a springboard to get my loan and in the end got two LOIs. Only one was feasible but that was enough and terms were excellent (market).

I share this story because it describes me and my approach. I don't believe that pampering someone with golf is my thing. I want you to work with me for other reasons. Main reason - because it is good for you! Because my grit should give you comfort in my commitment to repaying your loans. I am sure @SteveO can share his experiences and confirm that lenders primarily want to know they are lending to good people. "Buying" loyalty can work, but it also attracts the wrong kind of lenders.

Side note about lenders... those small banks are better IMO and people should use them as long as possible. The “tier 1” banks can attach a lot of extra rules to their loans like covenants and stuff that can really hurt you in a pinch. This may only apply to business loans. Not real estate. But just from my experience, local banks are a lot better than the Chase, Wells Fargo, and BoA types.

For anyone curious, look up “loan covenants.” In some cases, even if you pay in full on time for 20 years, you can be in default if your business isn’t doing well when the whole economy is down... 2020 being a good example.

That’s why negotiating with smaller banks can be waaaay better.

 

[Antifragile]

This post belongs in this thread...

I'll just quote myself

Probably the wrong thread for this, but hell... minor detour from BTC talk might be welcome.

**What was driving the crazy RE prices in BC and Vancouver?**
- Low interest rates
- Rising immigration
- increased savings by some Canadians during the pandemic
- desires for more living space because of changes in ways of working (making a living)

Federal Gov increased immigration significantly. And Canada has the lowest number of housing units per 1,000 residents of any G7 country. And this number has been falling since 2016.

What about supply? Even if municipalities found a way to process and approve applications faster... labour shortages are still a problem. There isn't a clear way yet to build to the demand. Could co-living arrangements solve this? Like single family rentals?

**Where are we heading next?**
How do I decide? Ask the following questions:

• Economy: Vibrant or Sluggish? I say sluggish.
• Outlook: Positive or Negative? I say negative.
• Lenders: Eager or Reticent? I say patient.
• Capital markets: Loose or Tight? I say tight.
• Capital: Plentiful or Scarce? Still plentiful...

It sure feels like a correction in the making today! It might not show immediately but even undersupplied housing can and does correct. We are post pandemic, meaning people are out spending money again (savings are down), inflation is up, interest rates are higher and will be even higher. Many of the immigrants will come with little to no money (if they come from Ukraine).

CRE take longer to reflect reality because typically it is income based and long leases do not change, neither take-out loans with fixed interest.

**Conclusion? ...**

Hmm...

 

[Guest-5ty5s4]

So @Antifragile are you and your firm still building new construction as quickly, especially multi-family, or are you slowing down due to rising rates? I'd imagine the interest rates play a BIG role in what you can sell the finished product for, no?

But the supply and demand may make it still very profitable, regardless of rates?

 

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[Antifragile]

So @Antifragile are you and your firm still building new construction as quickly, especially multi-family, or are you slowing down due to rising rates? I'd imagine the interest rates play a BIG role in what you can sell the finished product for, no?

But the supply and demand may make it still very profitable, regardless of rates?

My world has changed. I’m not building / constructing anything in the next 12 months. Only completing what’s under construction, but not starting anything new. Pro-forma costs are too high.

There might be good buying opportunities … I can only hope.

 

[Guest-5ty5s4]

My world has changed. I’m not building / constructing anything in the next 12 months. Only completing what’s under construction, but not starting anything new. Pro-forma costs are too high.

There might be good buying opportunities … I can only hope.

Wow that’s crazy!!! Insane how much central banks and governments can affect business with rate controls and things like that.

Okay, well perhaps there is a pivot to a different product or option since real estate offers tons of diverse opportunities. It seems like there’s hundreds of ways to make money in real estate, from land subdivision, to new home construction, to commercial development, build to rent, to client builds.

Anyway, that’s crazy. We’ll see how this all shakes out. I’m in it too, on a microscopic scale with 2 houses.

 

[Antifragile]

Wow that’s crazy!!! Insane how much central banks and governments can affect business with rate controls and things like that.

Okay, well perhaps there is a pivot to a different product or option since real estate offers tons of diverse opportunities. It seems like there’s hundreds of ways to make money in real estate, from land subdivision, to new home construction, to commercial development, build to rent, to client builds.

Anyway, that’s crazy. We’ll see how this all shakes out. I’m in it too, on a microscopic scale with 2 houses.

Let me clarify:

- The rate hike isn't what is driving our decision. That decision has been made before rate hikes and we purposefully acquired sites that require rezoning. 5 years ago, we would only acquire sites that did NOT require rezoning!
- The reason for this change is cost of construction. For one of our projects, the class B budget to tender gap was barely 3 months beginning of this year, yet price hike was over 20%. The end unit price didn't grow enough. We saw this coming, we prepared and delivered our projects on time and on budget through the pandemic.
- Other projects that were in the pipeline, we continued with design and approvals. And one project we listed for sale (under contract right now).
- Rate hikes only made things worse, but the decisions we made were before. Decisions that were reinforced by the hikes.

Note: Canadian home prices declined for the second straight month. Higher borrowing costs caused an abrupt turnaround in our housing market. I expect a lot of projects to be on hold in short order, something we wanted to avoid.

 

[Tammyanne]

I have listened to Kyle and enjoyed your talks and guests! Informative!