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What Cards to Play: How Developers and Builders Structure Deals

Not many will think of going into property development to make the most out of their savings. Movies and TV shows, however, have been successful in etching in our minds a picture of someone who works in real estate. Responses like “I work in real estate,” immediately brings up men in suits, ties, and briefcases who talk to different people to strike a deal. Their families have a fairly good living and they live in comfortable homes with convenient.

Closing a construction deal
But how do they really earn money? It turns out, though, that it takes more than a suit and tie to dabble in property development. It involves different kinds of people, companies, and professions. As an aspiring developer, you need knowledge about marketing, land economics, real estate market, builders’ structure deals, and more.

One of the important things you would need to know, though, is how to structure a joint venture deal.

A Peek into How Builders Structure Deals

According to R. John Anderson in an article in Strong Towns, builders structure deals involving money and contracts between the parties involved in property development process. The structure is discussed by the following people:

  • the person overlooking the entire process (you)
  • your operating partner
  • a capital partner
  • the source of your capital money

Between these people, the structure is basically a spreadsheet detailing the percentages of sales or returns the development would earn, and how these would be divided between the involved parties.

Brodies, an investment website, details the different ways that builders structure deals when it comes to residential development. They can guide you in addressing the unavailability of funding opportunities for development projects while helping you maximize profits, minimize risk, and reduce front-up costs.

    Build Agreements

    In this agreement, the landowner (you) and a house builder agree to develop residential sites without the landowner handing land title to the latter. You would only provide statutory consents to the housebuilder to develop the land on an agreed timeframe. Once the project is done and the houses are sold, you are entitled to turn over the title to the purchasers and receive a percentage of the sales.

    Overage Deals

    In this scenario, a housebuilder would offer to buy the title of land from you, plus a percentage of the sale proceeds.

    Joint Ventures

    This is how most builders structure deals. It is the most common structure followed by aspiring developers that couldn’t finance the whole property development process. According to Rev N You, joint ventures or JVs can help you purchase more property without having to exert all the effort. You can stick to being the overseers and managers of the whole operation while acquiring partners who deal with building design and construction, and financing. JVs can be structured into the standard 50:50 percent split between parties, but you can also propose a 40:60 percent, depending on the skills, knowledge, and investment each party lays down the table for the project.

The aforementioned kinds of structures are not strictly confined to residential property development. They could also work for luxury property development or business areas developments.

It must also be clear that knowledge of how builders structure deals is not enough to earn you a ticket into real estate success. You must equip yourself with knowledge about government and town building policies, architecture, land market language, an eye for profitable property, and many other things. The returns of the real estate game may be high, but it requires you to give it your all.

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