Real Estate Development Risks
There are a lot of potential risks involved in property or real estate dealings. People who are involved in the business strive to steer clear of any such problematic situations. Though I have been involved in training potential entrants to the field, I am surprised to discover the fact that the majority purchase a piece of land or property with a small portion of their personal savings and pay the lion’s share by taking a loan from a financial institution.
Most of the people who are new entrants in the domain of real estate business attempt to take possession of the land. However, a person with prior experience will never do the same. You should initiate your project by the process, which are least expected to take up in the first and place and thereby heighten the ‘risk’ quotient involved.
As far as the potential viability of a land is concerned, it is determined by the way you plan to develop it. The way your city has been planned also plays a vital role in this regard along with the specific area that you are looking forward to for construction.
This can be better understood by a small instance. If you plan to build a housing complex on a strip of land that belongs to the rural section, it is not possible.
As a real estate developer if you purchase land in the industrial belt and plan to construct a fashionable mall on it, then you will not get the required permission to do it. What experienced construction people tend to do is to study the plan of the town minutely along with the rules that govern construction in specific areas.
There is another area that I wish to touch down upon. Most of the people who are new to the real estate business tend to disregard the process of selection, of the mode of financing as they start out their projects by acquiring a piece of land.
A large number of these people are ignorant about the available modes of financing and consider mortgaging for a period of twenty to thirty years, their sole option. But if you are a builder, it not at all, the right source for garnering finances.
You may want to know what is wrong in that. The problem is repayments for mortgage loans need to be made on a monthly basis. In that case, you might well have to pay it from your own account. This can be afforded by established builders but is not at all a safe option for those who are still struggling to make their mark.
Paying back the loaner from your monthly income is not all advisable. The rate of interest is applicable on the lump sum that is taken by the builder as a loan and is divided into easy monthly installments. After the calculation has been done the interest amount along with the principal makes for the total amount that is to be repaid.
Moreover, mortgage is not a safe bet considering the fact that a particular construction project may drag on for some years. At the end you will have to pay back the amount over a long period of time and substantially more than what you had loaned. As a result of this long-term payback commitment, it is definitely not meant for an amateur builder.
In such a scenario, the builder is engaging himself to the property without being ‘exactly’ sure of what he wants and how he plans to start construction and that too with inappropriate financing. This is why, as I pointed out in the beginning, it is not at all advisable to go on the back foot initially.
Some other points that can emerge as potential risks at the time of developing a property are absence of a proper plan and information about the real estate market.
After examining the condition of the market, several developers do not prefer to call themselves ‘manufacturers’. Just like when you venture out to buy something, you look forward to some of its unique characteristics, which make it saleable.
First and foremost, it should be available at an affordable rate, should have an intrinsic quality of its own, must serve its purpose adequately and should be attractive enough. The product should be manufactured after conduct a proper research of the customer base.
No matter what purpose it serves, housing or official, the real estate product has to clear all the above-mentioned norms.
This is what I propose in my classes and tell my students that if you want establish your name in the real estate business then it is imperative that the prospective buyers “love” what you have to offer so that you can sell your product profitably. It is necessary to make yourself known in the market.
The best way in which you can learn the tricks of the trade and embark on a successful stint in the business is by accompanying an established builder who has been in the thick of things for years.
The final threat involved in the business is that of been initiated into it without a proper development channel.
Now let me revert back to what has already been said about the purchase of land in inappropriate zones and using the wrong mode of finances. What will happen then? Then you are obviously stuck with the question ” What do I Do Next”?
When you ponder over these issues you are just wasting ‘Time’ and energy over it and it will add up to your loan that you will have to pay back on a monthly basis.
Now I am sure you must have realized how risky it is to invest in real estate in such an ignorant and unplanned manner, additionally I am sure you have an answer to your earlier question.