Real estate development has been a path to prosperity for as long as real estate has existed, which many real estate developers becoming seasoned professionals along the way, However, even experts make mistakes, and first-time developers in particular have many potential pitfalls to be aware of. Real estate development can and should be lucrative and profitable - but only if you avoid the errors we’ve identified as the 3 biggest mistakes developers frequently make.
Mistake #1: Pricing the Property Wrong From the Start
This is the most costly mistake of all. It can be tempting to project a sale price based on the development cost, best-case scenario, or simply the desired profit margin.
Buyers don’t care about any of that. They care about the current market value. Basing your projected sale price on anything else puts developers at risk of overpricing their finished unit.
An overpriced unit can sit on the market for weeks, months, or longer, looking less and less attractive with each passing day. Some developers are forced to sell at a loss for below the current market value because the listing sat for too long.
Much better to consult an experienced brokerage at the beginning of the project to make sure your target sale price is realistic.
Mistake #2: Building for Yourself Instead of the Buyer
Developers often fall into the trap of building for themselves. The kitchen they like. The finishes they like. An unusual layout they feel particularly drawn to. The developer likes it … how could anyone else not?
But unless the developer intends to occupy the property, they need to ask who they’re building it for. What is their lifestyle? Is it a family? Single working professional? Empty nester? Investor? Luxury buyer? How will the target buyer actually use the space?
Designing the home based not on the developer’s preferences but on the preferences of the target buyer helps position the finished home for the fastest possible sale at the highest possible price.
Mistake #3: Underestimating Holding Time & Costs
Never underestimate a municipality’s ability to drag out an approval. This is particularly true of our state, Massachusetts, with its historic-district restrictions. Zoning, building permits, neighborhood review, utility coordination … These can all burn pages on the calendar, while interest, taxes, insurance, construction overhead, and opportunity cost all tick up.
Smart developers build contingencies into both their schedule and their budget in case even their worst-case-scenario for the permitting and development timelines wind up in the rearview mirror.
Bottom Line
The good news about these potential developer mistakes is that you can plan for them. No real estate investment is without risk, but by understanding what you’re up against you can give your development every possible chance of success.
Frequently Asked Questions
Q: When should a developer bring in a real estate brokerage?
A: As early as possible. It’s never too early to get an expert opinion of what your proposed project might sell for. The latest prudent time to loop in a brokerage is before any major product and pricing decisions have been locked. A broker can also give informed feedback on variables like unit mix, floor plans, and pricing.
Q: Why is initial pricing so important for a new development?
A: The most critical period for a real estate listing is when it is new to the market. That’s when every buyer is most interested and wants to see it. This demand makes it more likely to sell at the highest possible price. However, if the listing is overpriced, the earliest viewers are likely to pass, causing the listing to sit on the market day after day, week after week. Even new buyers on the market see those days on the market and wonder “What’s wrong with it?” A long listing starts to look problematic, making it harder and harder to entice buyers to even look at it. Many developers in this situation end up lowering the price to try to drum up interest — often below the price they could have commanded if they got the price right the first time.
Q: Should every condo in a new development have the same price per square foot?
A: Definitely not. Price-per-square-foot is a helpful benchmark, but many factors weigh into the perceived value of a condo in the eyes of a buyer, including views, natural light, the floor plan, and other attributes specific to the unit. Simply pricing a condo listing based on the square feet will likely result in mistaken pricing.
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