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Real Estate Development Risks and How to Minimize Them

As a real estate developer, your goal is to identify prime land, develop a property, and either sell or lease it out for a profit. The field has its share of challenges and you need more than financial strength to be successful.

While it’s important to develop key relationships, understand the market, as well as your own vision, it is equally vital to know the risks involved and what you can do in case you run into trouble.

Learn about the basics.

To be a successful developer, a college degree is not a must. However, you must acquaint yourself with the basics of real estate transactions, urban development, construction, and contractors. Without basic knowledge of the industry, your chances of success could be quite slim.

If you have no college education regarding finance or construction management, it’s advisable to work first in the sector to learn a few real estate development tips. Consequently, you’ll gain some key skills and practical knowledge regarding property development. Besides, you can register for real estate licensing programs, some of which issue licenses within three or six months. Overall, the knowledge you gain in such programs could provide a foundation to get started.

Risks Involved

Like any other sector, the real estate development industry has its share of risks, which are generally grouped as follows:

1. Physical attributes

In this category, the physical characteristics of land might not be the same as what you expected. For example, you might find out that the soil has a poor quality after the acquisition.

2. Government regulations

Government regulations could hinder land use according to how you anticipated. For example, you might not get a zoning change or environmental controls in place for an existing project. These challenges could further hamper the development of your property.

3. Financial variances

This risk arises in a situation where the cost of construction or development is different from what you expected. This could be due to differences in site conditions or a delay.

4. Economic factors

Local economic factors could also pose challenges to the development of the property, especially when the project fails to work according to your expected time frame. This can cause the project to drag and close out later than expected.

What can you do?

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As a developer, you can only minimize some of these challenges by getting adequate information and acting on it as early as possible. For that reason, a feasibility study is a key component of real estate development.

Similarly, you can delay buying the land and wait for government permission. Another option is to purchase land in already zoned areas. For differences in construction cost, you can minimize that by including a contingency in your budget.

Overall, it’s important to know what you can control and what you cannot. For instance, you could have your own prediction of the market, but the ultimate outcome depends on the prevailing economic, social, and local factors. Consumer preferences, changes in interest rates, and economic outlook are all difficult to predict over a long period. And once you start a project, you cannot stop.

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