Real estate developers envision, organize, and execute construction or renovation projects for commercial or private use. This process involves negotiations with property owners, real estate agents, investors, lending institutions such as banks and insurance companies, architects, lawyers, general contractors, government officials, and other interested parties. Developers may work independently as consultants or in partnership with other professionals involved in real estate development.
Real Estate Developer Career History
The United States is a relatively young country without a long history of densely populated cities. In Europe, however, there is evidence of urban areas from as far back as 3,000 years ago. In areas of early Roman settlement, archaeologists have discovered the remnants of street grids, sewage lines, and uniform construction indicating some level of formal planning. Since the Middle Ages, cities like Paris have had municipal regulations governing the placement and use of buildings.
Such planning and regulations emerge when many people try to live harmoniously in a limited space. In these situations, land is expensive. Construction of homes, roads for travel, or public buildings for commerce and government requires a substantial investment of money. The developer is the entrepreneur who sees an opportunity to make money by providing services, in the form of buildings or infrastructure, to the community. The developer’s role is to envision development, organize investors to fund land purchase and construction, and oversee the project.
Individuals have played this role in much the same way as long as people have lived in settled communities. What has changed, and what continues to change, are the zoning laws and building codes regulating development and the tax laws affecting the organization of the development entity.
The Job of Real Estate Developers
A developer may be involved in purchasing 500 suburban acres and developing 1,000 condominiums, a couple of parks, a golf course, and a small shopping center with a grocery store, full-service dry cleaner, video rental store, and health club. Or a developer may renovate and remodel an existing structure, such as a warehouse, for use as a restaurant and office space. The developer’s actual day-to-day activities vary depending on the type and size of the project.
Whether a group of investors approaches the developer or the developer searches out investors, the first step is to structure the development entity, a group made up of the project owner (the person or group who will receive the profits or suffer the losses from the proposed development), the investors who put up the initial equity funds, and the developer. In many cases, the developer is the owner. These individuals may establish a development entity with only one owner, a partnership with a lead owner, a limited partnership, or a corporation that sells stock to stockholders.
The legal definitions of each type of entity vary according to locale, and the benefits and risks of each are quite different. The developer, who facilitates the process of structuring the contract, is concerned with three main issues—managing risk, gathering equity to facilitate borrowing money, and creating a functioning structure with a limited number of people involved in decision-making.
The developer’s job at the beginning of a project has been compared to pitching a tent in high wind. The toughest thing is getting the first corner nailed down. In negotiating with potential investors, the developer brings all interested parties to the table to secure an initial commitment of equity funds. Without equity, the developer is unable to approach banks or insurance companies for loans to complete the project.
The developer might come to the table with $100,000 of personal money to invest—or none. With an excellent track record and a solid proposal, the developer’s involvement in the project may be enough to secure the confidence of potential investors. But the developer must show a willingness to protect these investors by creating a development entity that exposes them to only reasonable risk.
Most investors want to risk only the equity money they contribute. In other words, if the project fails, they do not want to be held liable for all the money lost. The contract therefore must protect their other assets, such as their homes, savings accounts, and other investments, in case of a default on the loans. The contract must therefore be written in such a way that the investors are willing to accept the risk involved.
After securing the equity necessary to convince financial institutions to participate in the project, the developer approaches these institutions (primarily banks and insurance companies) to secure financing.
Most development projects require both short-term and long-term financing. Banks often provide the money to buy land and complete construction. However, to receive this short-term financing, sometimes called a construction loan, the developer must already have equity funds from the investors. The equity money might equal from 10 to 40 percent of the total amount of the loan.
Insurance companies are the most common providers of long-term financing, which is used to pay off the construction loan. Long-term financing commitments are based on the economic projections of the completed development and usually must be obtained before securing short-term financing. Occasionally one institution will provide both the short-term and long-term financing, but this is less likely to happen with larger projects.
Another participant in real estate financing is the government. Sometimes a municipal government will issue a bond to raise money from taxes. These funds may provide long-term financing to a private developer for the construction of a stadium, for example, or for some infrastructure improvement, such as widening the streets. Municipal governments frequently participate in projects to develop run-down areas of the city. In exchange for shouldering some of the financial risk, the city stands to benefit from the increased productivity of the renovated neighborhood.
Before receiving a building permit, the real estate developer may have to complete impact studies to assess how the proposed project will affect the community and the environment. He or she may also have to meet with the zoning board if there are regulations that the new building will be unable to meet.
At this stage, the project needs an architect. The architect’s first job usually is to hire a structural engineer and a mechanical engineer. Together they create the building plans, which the developer submits to the building department.
This process of creating the plans involves consideration of economics, aesthetic architectural concerns, building codes, and other legal constraints imposed by the community. This is one of the most exciting and important times in the development process. Through the competition of the interests of all the involved parties, the best use for the site evolves, and the project is born.
While waiting for the building permit to be issued, the developer also puts the building plans out for bids from general contractors. The general contractor selected for the job hires subcontractors, such as carpenters, plumbers, roofers, and drywallers.
In applying for the building permit and preparing to break ground on the construction site, developers spend a lot of time dealing with government regulations. They must make sure that they understand and meet building codes designed to ensure the safety of future occupants. Windows in a residential building, for example, must have a certain number of square feet for light and a certain number for ventilation.
Developers must be aware not only of building codes but also of laws affecting construction. New buildings, for example, must meet handicap access codes to comply with the Americans with Disabilities Act.
On large projects, such as the development of a skyscraper, the developer will contract out much of the work, such as public relations and advertising, the completion of impact studies, and the general contractor’s job. On smaller projects, however, the developer may perform some or all of these functions.
As general contractor, the developer is involved on a daily basis with work at the construction site. If someone else is hired as general contractor, the developer may only be involved at weekly construction meetings, where the architect, engineers, and various subcontractors discuss progress and changes necessary in the plans.
In either case, the developer, who is ultimately responsible for the success or failure of the project, must be knowledgeable about all aspects of the development process and capable of hiring a group of people who can work successfully as a team. Though the developer may or may not be an investor who stands to lose money, the developer’s career is on the line with every project.
If a developer secures city approval and necessary funds to construct a new office building in a highly visible spot, the whole city may be watching. The local government officials may have used their influence to change zoning laws in favor of the project. Therefore, their reputations also may be riding on the building’s success. If, for example, the construction costs exceed the initial estimates, and the developer is unable to raise the additional money to cover the costs, construction on the building may be halted at any stage, and the empty shell may stand for years as an eyesore in the community.
Failure to complete such projects successfully inhibits the developer’s ability to secure investors and government cooperation in the future. Depending on the terms of the developer’s contract, it may also mean that the developer is never compensated for the time and work spent on the project.
Once the project is complete, the developer’s role depends on the specifications set forth by the development entity. With a high-rise residential building, for example, the developer may be involved in selling or renting the apartments. As an owner in the project, the developer may be involved in the management of rental property for many years.
Real Estate Developer Career Requirements
There are no specific educational requirements or certifications for becoming a real estate developer, but many developers have college degrees, and some have advanced degrees. While you are in high school, you can prepare for a career in real estate development by pursuing a broad-based liberal arts curriculum that will prepare you for a college education. In addition, courses in business, economics, finance, mathematics, speech communications, drafting, and shop will be helpful.
Schools generally do not offer a specific curriculum that leads to a career as a real estate developer. Because the position requires a broad base of knowledge as well as some experience in the business community, most people become real estate developers after leaving an earlier career.
There are a few schools that offer undergraduate degrees in real estate, usually as a concentration within a general business degree program. Ohio State University, for example, offers a bachelor’s degree in Real Estate and Urban Analysis. There are even fewer graduate degree programs in real estate, such as the University of South Carolina’s master’s degree in real estate development. Some schools offer master of business administration programs with a concentration in real estate.
Graduate degrees in law, business, and architecture are among the most beneficial to the real estate developer. If you are interested in pursuing an advanced degree in one of these areas, you should complete the necessary preparatory work as an undergraduate.
To pursue a law degree, you need a strong background in the liberal arts, including English, philosophy, history, and government. Good preparation for a master’s degree in business includes course work in finance, marketing, accounting, business communications, and higherlevel mathematics. An advanced degree in architecture requires an emphasis on drafting, mathematics, engineering, and physics.
Real estate development is regarded as one of the most challenging careers in the real estate industry. You must have the ability to speculate about the economy and envision profitable ventures in addition to having a broad knowledge of the legal, financial, political, and construction issues related to development. Consequently, a background in law, architecture, or general contracting can be highly beneficial.
It is useful to have a working knowledge of both zoning laws and building codes. While it is the architect’s primary responsibility to ensure that the plans ultimately submitted to the building department will be approved, the knowledgeable developer may decide it is appropriate to seek a variance in zoning or code. This is most common with non-safety issues, such as the number of parking spaces required. A municipality might grant a variance if you present a convincing case that the project will create a significant number of jobs for the community.
You also must understand the marketplace. For this reason, experience in appraising, leasing, or selling real estate can prove very helpful. Real estate brokers who lease office space often have excellent contacts and knowledge for entering the development business. They know where the potential tenants are, and they understand the issues involved in developing large buildings for commercial use. You also must grasp the basics of finance to structure the development entity effectively.
Exploring Real Estate Developer Career
Read the real estate section of the local newspaper and follow the building and development activities in the community to gain exposure to this industry. A local librarian should also be able to refer you to books and magazines about real estate development. Sometimes a teacher will be able to arrange for a developer or other real estate professional to visit and talk about his or her work.
You can also prepare for your careers by working in the offices of the following professionals: real estate developers, lawyers practicing within the real estate industry, architects, and general contractors. Spending time in any of these offices will introduce you to the general milieu of the real estate developer’s world. The early exposure can also help you decide in which of these areas you most want to develop expertise.
You can gain good experience in certain aspects of real estate development by doing public relations, publicity, or advertising work and participating in fund-raising campaigns for school and community organizations. Volunteering with a housing advocacy organization, such as Habitat for Humanity, may provide opportunities to learn about home construction, bank financing, and legal contracts. To gain confidence and develop a business sense, take on leadership roles at school and in extracurricular activities, such as the student council or the business club.
Real estate developers often work independently or open offices in communities that have property with the potential for development. The activity of the real estate marketplace will dictate the number of opportunities in a given community.
There is no specific way to become a real estate developer. Successful real estate developers are always central to the project, facilitating communication among the various participants. This often requires finely tuned diplomatic skills. Their proven track record, professional manner, and influence in the real estate world are their biggest assets. They have the ability to sell ideas and secure large sums of money from investors and lending institutions.
Most developers do not begin their careers in this field. They frequently have backgrounds as lawyers, architects, real estate brokers, or general contractors, positions that allow them to gain the expertise and contacts necessary for success in real estate development.
Many real estate developers secure work because they have an established reputation. Their contacts and knowledge in a particular community or type of real estate allow them to work more effectively than others. But developers also are successful because of their abilities in analyzing the marketplace, structuring solid investment proposals, facilitating the creation of the development entity, and overseeing projects.
The real estate developer is really at the top of the profession. Advancement involves larger, more prestigious projects and earning more money. Such achievements may take several years. It is important to keep in mind that even the most successful developers suffer setbacks when projects fail. For those not-so-successful developers, such setbacks can end a career.
There is no set pay scale for real estate developers. How much they make depends on their skill and experience, the size of the projects on which they work, the structure established for their payment in the development entity contract, and the successful completion of the project.
Sometimes, developers are contracted by a group of individual investors or a company to manage a project. In this case they may work out a consulting agreement with a certain secured fee up front, preset fees paid throughout the duration of the project, and some percentage of the profits once the project is complete. Or the agreement may contain some combination of these payment options.
A less experienced developer will often shoulder more risk on a project to gain expertise and complete work that will improve the developer’s reputation. In these instances, developers may be undercompensated or not paid at all for their time and effort if the project fails.
According to the Ford Career Center of the University of Texas, graduates with a bachelor’s degree in business administration working in real estate earned an average salary of $43,691 in 2003. The average salary for M.B.A. graduates in real estate was $66,500.
Real estate developers are often highly visible individuals in the community. It is important that they have excellent communication skills, be able to work with all kinds of people, and enjoy the speculative nature of their business.
Developers spend a great deal of time negotiating with executives in banks and insurance companies, government officials, and private or corporate business investors. A certain professionalism and comfort in executive situations is necessary for success.
However, some developers report to the job site every day, don a hard hat, and oversee the work of roofers, plumbers, and electricians. The developer must be flexible enough to adjust to the job’s varying demands.
In addition to staying in touch with investors and overseeing the project, developers sometimes may need to respond to the public and the media. Controversial, high-profile projects often put the developer under a spotlight, requiring excellent public relations skills.
Real estate developers, because of the complexity of their jobs and the often large sums of money at stake, work under a great deal of pressure and stress. While the level of risk and the potential profit depend on the developer’s role in the development entity, those who like a steady schedule with a dependable paycheck may not be well-suited to this career.
Hours can be long and frequently vary with the type of project and stage of development. Developers may have to attend city council meetings or neighborhood meetings in the evening if they are seeking changes in zoning laws before applying for a building permit. In addition to having the potential to earn a large sum of money, developers enjoy the satisfaction of seeing a project evolve from its inception through various stages of planning and finally into a finished, usable structure.
Though their work depends on the cooperation of other individuals and organizations, developers also enjoy a certain level of independence and flexibility in their lifestyles. As entrepreneurs, they shoulder a lot of personal risk for their businesses, but this brings with it great opportunities to do creative work and positively influence their communities while potentially earning a handsome profit.
Real Estate Developer Career Outlook
The outlook for real estate developers is subject to the fluctuations of the general economy. In the late 1990s, economic conditions were excellent for real estate developers. Record-low interest rates roused many formerly depressed areas of the country to renewed economic vigor. In the beginning of the 21st century there was slow growth in the real estate industry, and that is expected to continue through the near future. But economic conditions are never fixed or stable. In addition, the real estate market can be quite strong in some parts of the country and weak in others.