We are actively teaching people how to become small-scale developers to change their neighborhoods, so people frequently ask us "How do I get started as a small developer?" The process of becoming a developer is actually simple and straightforward, but it is not easy.
People tend to complicate things they don't understand. It get worse when we really want to understand something new. If we don't know about something, we can readily gather so much detailed information about it via the Internet, that we can't understand the difference between the core critical information and the details that will not matter if we don't get a handle on the core critical stuff.
Here are the four critical tasks for a small developer trying to get their first project off the ground:
- Do your homework and produce a Pitch Package for your project.
- Get control of the property you want with a purchase contract.
- Find a Capital Partner (an investor) who can meet a bank's requirements for a construction loan.
- Negotiate a Construction Loan with a small local bank.
Those are the four steps. And that is the order of the four steps. Without doing your homework you don't actually know if the project will make money. After doing your homework, you may be convinced that the project will make money, but without preparing a good Pitch Package, you really don't have a tool to help you explain how the project makes money to a potential Capital Partner or someone who will introduce you to a potential Capital Partner. Without a Capital Partner willing to put up 20-25% of the project cost you will not be able to meet the bank's requirements and the bank cannot provide your project with a construction loan.
So if you have the knowhow that will help you get your homework done and assemble a good pitch package the most direct route through the next steps is to identify the individuals at small local banks in your area that make construction loans. Now go meet with each of them and explain your project. Tell each banker that you are looking for the right Capital Partner for the project. Ask the banker to help you find a potential partner that would be a good fit for your project. Bankers typically know several people who would be well suited to back a small project. If you don't get results with the local banks, expand your circle and ask other professionals in your area; real estate brokers, lawyers, CPA's.
Putting in the time and attention necessary to produce a good Pitch Package will give you greater confidence in how your project will make money. The more confidence you have in your project, the easier it becomes to ask someone you know to invest in the project of to ask people to introduce you to someone who would want to invest in the project.
There is currently a lot of buzz surrounding the use of Crowdfunding for small real estate projects. While Crowdfunding presents a lot of possibility, this shiny new tool set does not relieve the new developer from going through the rigor of doing your homework and producing your pitch package. A Crowdfunding operation will require a more extensive due diligence package than a local Capital Partner and bank. Crowdfunding does not provide shortcuts or make things less complicated. You may want to consider Crowdfunding down the line, after you know how to deliver on the basics, but learn the mechanics of the developer's job before you decide to get fancy.
(Top photo by Johnny Sanphillippo)
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