Commercial land development is not just a nice way to make money. It is also a powerful way to showcase your ingenuity and turn innovative ideas into reality.
However, like every commercial real estate investment, there are challenges and your ability to solve them will determine your success.
This article highlights some key challenges and how you can do just that.
Choosing the right site
In real estate, location is often the difference between a great investment and a poor one.
Buying quality land in locations where demand for CRE is low or projected to drop is bad business. Instead, focus on cities and towns where the local economy is growing and individuals and businesses are thriving.
Furthermore, even within prime cities and towns, you need to select a site that matches your vision. You should be concerned about the presence of infrastructure, the number of access points, land size and topography, and the nature of traffic flow, among others.
Avoiding legal troubles
Legal troubles can come in two ways: the seller is not the owner of the property or there are encroachments, liens, or zoning regulations on the land.
Many developers who have not done due diligence on these two fronts have faced legal troubles that derailed their projects.
Thus, before getting too far ahead, you want to check the land’s title and verify its ownership and confirm with the municipal authority that there are no encroachments, lien, or zoning restrictions on the land.
Confirming economic viability
The fact that the site is in a good location does not mean there will be effective demand for the property you want to build.
The inability to understand this has led many developers to waste money on unviable projects.
Confirming economic viability involves speaking with locals to gauge their interest in the property, checking demographic data to see if the population is not too young or old for what you are proposing, and reviewing market research reports to confirm if they can afford it.
Confirming financial viability
Economic viability is all about effective demand for the property. Financial viability, on the other hand, seeks to confirm if the project makes sense from your perspective.
In essence, does it make financial sense for you to go on with the project?
On the one hand, you want to estimate the costs of development. On the other hand, you want to estimate the selling price (if you are selling immediately) or net operating income (if you are leasing the property).
If the rate of return or cap rate meets your investment goal, then you can proceed to the next step.
Paying a fair price for the land
When preparing your budget, you must include a fair value for the land. You can value the land by checking the price of comparable land.
The key challenge here is ensuring that you don’t overpay for the land. Having a fair value in mind is one thing, sticking to that price during negotiations is another.
If the seller insists on a higher price than what you think the land is worth, you must consider if purchasing at that higher price is financially viable for you.
Supervising the construction
Not every developer has the time to directly supervise a construction project. That is not a problem as you can outsource to construction firms and supervisors.
However, becoming passive throughout the process is not acceptable. You may trust them not to defraud you but you must still need to ensure that they don’t get certain minute details wrong. Since the idea came from your mind, your eyes must consider if what is before it matches what the mind envisioned.
The earlier you do this, the better.
So, ask for regular reports, pay scheduled visits to the site, and surprise everyone with unscheduled visits.
While you are securing funding for commercial land development, remember that you must pay an earnest money deposit before you can do due diligence on any land and negotiate its price with the seller.
Therefore, you must have a secured source that can provide you with earnest money deposits for all your CRE deals.
Duckfund is an earnest money financing company that does this well. The application process takes just two minutes (no credit report required) and you can get the earnest money deposit transferred to an escrow within 48 hours.
More importantly, you can pursue many deals at the same time and get earnest money deposit financing for each one of them.
Do you want to be a successful commercial land developer? Secure your earnest money deposits and follow all the eight steps above to be ahead of your competitors.