Real estate developing is a riskier and potentially more rewarding venture than traditional real estate investing. The developer does more than to update or remodel a property. He may buy a vacant lot and build upon it or by a property to tear down and build something more commercially viable.
The Risks of Real Estate Developing
The risk in developing land in this way is inherent, because the developer uses his own funds to finance the project. If he can’t find a buyer, he’s out the money he invested and stuck with the property.
In government projects, that risk is minimized. The city or state will commission the project as a means of revitalizing a neighborhood and to create new jobs for the community. In that case, it’s considered a public works projected and is financed through a pre-established budget.
Private developers, on the other hand, face the greatest risk. They must look at a project as a long-term undertaking that will pay off for all of the labor, resources, and time invested into completing it. This means the completed property must have a high market value and it must meet a demand within the community.
Developers Face Legal Challenges as Well
Since the most promising projects are undertaken in urban areas, developers must comply with zoning regulations. In most cities, a system of Planned Urban Development is instituted to separate the city into zones. For instance, one area might be zoned as a residential neighborhood, while another part of the city is reserved for commercial businesses. When the developer obtains land in a residential neighborhood, he must apply to have the area rezoned.
The process of requesting a rezoning can take a significant amount of time, as city planners debate the issue. Meanwhile, the real estate developer must put his plans on hold and risk losing interested buyers due to the delay. By the time he does get the project approved and constructed, the market may have shifted or the demand may no longer be as high.
While these challenges do pose a financial risk for the real estate developer, the expected gains are well worth it. When he’s successful, the developer can expect a lucrative payday and the pride of having sold another project. As a real estate entrepreneur, he then moves on to his next project and begins the process anew.