Really enjoyed reading this post about being a real estate developer. I was just wondering if you could do a write up on the various jobs and functions in a typical real estate development company so that people like me, who intend to work for a developer can roughly know what kind of skills are required or demanded in order to work there.
It’s a great question and so I will try and answer it today. The first thing I should say though is that real estate developers are typically very lean on people. I’ve worked for big publicly traded real estate companies and small boutique ones, and the development teams are always fairly small.
It’s that way because development projects can be messy and intermittent. The industry itself is also prone to regular market cycles and so the strategy is generally to remain fairly lean and outsource a lot of the work. You ramp up consultants and suppliers on a per project basis – as you need them.
Really enjoyed reading this post about being a real estate developer. I was just wondering if you could do a write up on the various jobs and functions in a typical real estate development company so that people like me, who intend to work for a developer can roughly know what kind of skills are required or demanded in order to work there.
It’s a great question and so I will try and answer it today. The first thing I should say though is that real estate developers are typically very lean on people. I’ve worked for big publicly traded real estate companies and small boutique ones, and the development teams are always fairly small.
It’s that way because development projects can be messy and intermittent. The industry itself is also prone to regular market cycles and so the strategy is generally to remain fairly lean and outsource a lot of the work. You ramp up consultants and suppliers on a per project basis – as you need them.
With that said, let’s talk about the typical development process and some of the key skill sets required. A simplified process might look like this:
Buy development site (Acquisitions)
Design a project (Consultant Coordination)
Make sure project is feasible (Finance)
Obtain approvals for said project (Planning & Approvals)
Sell/lease space (Sales, Leasing & Marketing)
Build project (Construction)
Make money (The goal)
Depending on the size of the firm, one person may be responsible for managing many if not all of these steps, or they may be split up into different departments. So you could end up with a department list like this:
Acquisitions
Development/Project Management
Finance
Sales, Leasing & Marketing
Construction
From my experience as a developer, you’re going to be involved in all aspects. And that’s part of what makes development so exciting. But let’s talk about some of the key areas:
Planning & Approvals
After tying up a winning development site, securing your approvals (commonly referred to as “entitlements” in the US) is usually the first major step. The reason this step exists is because oftentimes what you want or hope to build isn’t what you’re actually allowed to build as-of-right.
So you have to go through a process to make that happen. It can take years depending on where you might be doing business, but there’s typically a significant amount of value creation at this stage. Some developers only focus on this stage and don't actually build.
City planning is a good background for this function. You need to understand the local planning policies and frameworks.
Consultant Coordination
As I mentioned before, development teams are often small. And that’s because all developers rely on outside consultants to make a project happen (architects, engineers, and so on). So a big part of being a strong developer is just being a strong project manager. The expression often thrown around the industry is that development is like herding cats.
Having some sort of a technical background helps for this function. You end up dealing with a lot of technical details (which I find super interesting), and so it helps to have a bit of a background or an interest. If you’re not inclined in this way, you might find this area boring.
Financial Modeling
Building project pro formas and managing budgets is obviously a key component of the development process. From the moment you first look at a site up until project completion, you’ll be building financial models and constantly refining them as you get more information. The first version might be on the back of a napkin and the last version might be a complex Excel spreadsheet.
Banking and finance is obviously a good background for this function. But you also need to understand the real estate business. Models are only as good as the information you feed it, so your assumptions have to be sound.
Sales, Leasing & Marketing
I cannot over emphasize the importance of this function. If you are not selling units or leasing space, then you do not have a project. So no matter how amazing you might be at all the other functions (even fundraising from investors), if your firm is not bringing in money from your customers (purchasers or tenants), then you are dead.
When I was at Penn, a lot of the real estate professors used to tell us that leasing is the best way to get started in the industry. And I don’t disagree with that – even though I didn’t start there. This is often handled by a separate department and/or outside team, but you’ll need to be intimately involved.
Construction
If you’re at this stage, that’s usually a good sign. It usually means you’ve managed to sell a bunch of units and/or lease a bunch of space. Some developers (with enough scale) will have a construction team in-house, but many others will just outsource it to a 3rd party. Regardless of the setup, it once again helps to have a technical background.
If I missed anything or you want to add more detail, please let me know in the comment section below. I’m always happy to receive questions and post ideas, so feel free to tweet or email me. Tweets will almost always get a faster response.
Venture capitalist Chris Dixon recently published an interesting post called, Two eras of the internet: pull and push. In it, he describes two patterns that have emerged within the internet over the past decade and a half.
Pull (2000s):
Pull is when you are seeking information, usually an answer to a question. You want to know the closing time of a restaurant, the description of a hotel where you are thinking about staying, the details of an historical event you heard about, etc. You go to your computer and pull the information. The killer app for pulling information was Google.
Push (2010s):
Push is when you are using the internet in a more passive way and content comes to you. The killer app for push is social networks, the most popular being Facebook. Information is pushed from user to user via likes, shares, tweets, etc. People tend to push things they find funny, interesting, moving, outrageous, etc.
Now let’s think about this for a second, because it’s a pretty significant change.
Google’s mission is to organize the world’s information. And they have certainly made it easier for us to get the information we want. Instead of physically searching for something, you just type in a few keywords and it pops up. But, it still involves us deciding we want something and then pulling the information.
What’s fascinating to me about push is the idea that content and information comes to you. And it’s one of the reasons that I’ve always found Foursquare more interesting than Yelp – even though Yelp is far more popular as a tool to help you find somewhere to eat, drink and so on.
When I walk into a restaurant or bar now, oftentimes I’ll see a Foursquare notification popup on my phone showing me a tip that somebody has left: “Try the meatballs – they’re to die for”. I didn’t search for that. I didn’t ask for a recommendation. But Foursquare knew where I was and presented me with that information.
Now, there are obviously potential downsides to constant interruption, but let’s focus here on the opportunities. How could these same principles to be applied to other industries such as, say, real estate?
I think there’s a pull and push parallel.
Today MLS operates in a way like a search engine for homes. You decide you might be interested in buying a home and so you go online and start pulling listings.
Of course, the vast majority of people also work with a real estate agent. And in a way they’re kind of like your push. They get to know you, they figure out what you’re looking for, and then they push relevant listings and information to you.
And maybe that’s why nobody has killed off real estate agents – despite the numerous attempts. Everybody has been focusing on new pull platforms (listing platforms) as opposed to a new push platform.
Who knows.
But I think it would be naive to think that these emerging push platforms won’t reach far beyond social media.
Yesterday Opendoor.com finally launched their product in Phoenix. If you’re a regular reader of Architect This City, you might remember that back in July of this year I wrote about how they had just raised $10M of funding to make selling your home as easy as a few clicks.
Well, since then, I’ve been following them like a hawk. I had all the founders on Twitter notification (so I got notified every time they tweeted) and I was eagerly anticipating their launch.
Now that they’ve launched, we have a much better idea of how their business model is going to work. I say “better idea” only because there’s still portions of it that are a question mark for me.
In any event, Opendoor basically provides instant liquidity to homeowners. You go on, tell them about your home, and they then make you an offer to buy, which looks like this and lasts for 3 days. The offer they make you is calculated using comparable sales and adjustments based on your home’s unique characteristics.
Upon accepting their offer, they then schedule a home inspection (at their cost) to confirm your home’s condition. Once this is done, you just select your move out date and Opendoor handles the rest. The fee for all this is 5.5%, which the company claims is less than the 6% that realtors typically charge (this would be high for Toronto).
After buying your home, Opendoor plans to turn around and resell it.
What this reminds me of is a “bought deal.” In the world of investment banking, a bought deal is when the bank itself agrees to buy the entire offering of a particular security, as opposed to going out to the market and trying to raise the money. The advantage to the company (offering the securities) is that there’s no financing risk. They know they’re going to get their money. But it usually means the company gets a lower price.
So what I wonder, is if this is what’s going to happen here. Since Opendoor is effectively taking on the selling risk, does that mean their offers will be lower? Or are all their costs built into that 5.5% and that’s truly their core business model? I’m sure some of this will surface in the coming weeks.
I do, however, think they are smart to be focusing on the supply-side of the marketplace and offering virtually perfect liquidity to homeowners. Real estate is a unique asset in that it’s difficult to bring supply to the market. And so if control the supply-side, I think you have a pretty good shot at controlling the market as a whole.
With that said, let’s talk about the typical development process and some of the key skill sets required. A simplified process might look like this:
Buy development site (Acquisitions)
Design a project (Consultant Coordination)
Make sure project is feasible (Finance)
Obtain approvals for said project (Planning & Approvals)
Sell/lease space (Sales, Leasing & Marketing)
Build project (Construction)
Make money (The goal)
Depending on the size of the firm, one person may be responsible for managing many if not all of these steps, or they may be split up into different departments. So you could end up with a department list like this:
Acquisitions
Development/Project Management
Finance
Sales, Leasing & Marketing
Construction
From my experience as a developer, you’re going to be involved in all aspects. And that’s part of what makes development so exciting. But let’s talk about some of the key areas:
Planning & Approvals
After tying up a winning development site, securing your approvals (commonly referred to as “entitlements” in the US) is usually the first major step. The reason this step exists is because oftentimes what you want or hope to build isn’t what you’re actually allowed to build as-of-right.
So you have to go through a process to make that happen. It can take years depending on where you might be doing business, but there’s typically a significant amount of value creation at this stage. Some developers only focus on this stage and don't actually build.
City planning is a good background for this function. You need to understand the local planning policies and frameworks.
Consultant Coordination
As I mentioned before, development teams are often small. And that’s because all developers rely on outside consultants to make a project happen (architects, engineers, and so on). So a big part of being a strong developer is just being a strong project manager. The expression often thrown around the industry is that development is like herding cats.
Having some sort of a technical background helps for this function. You end up dealing with a lot of technical details (which I find super interesting), and so it helps to have a bit of a background or an interest. If you’re not inclined in this way, you might find this area boring.
Financial Modeling
Building project pro formas and managing budgets is obviously a key component of the development process. From the moment you first look at a site up until project completion, you’ll be building financial models and constantly refining them as you get more information. The first version might be on the back of a napkin and the last version might be a complex Excel spreadsheet.
Banking and finance is obviously a good background for this function. But you also need to understand the real estate business. Models are only as good as the information you feed it, so your assumptions have to be sound.
Sales, Leasing & Marketing
I cannot over emphasize the importance of this function. If you are not selling units or leasing space, then you do not have a project. So no matter how amazing you might be at all the other functions (even fundraising from investors), if your firm is not bringing in money from your customers (purchasers or tenants), then you are dead.
When I was at Penn, a lot of the real estate professors used to tell us that leasing is the best way to get started in the industry. And I don’t disagree with that – even though I didn’t start there. This is often handled by a separate department and/or outside team, but you’ll need to be intimately involved.
Construction
If you’re at this stage, that’s usually a good sign. It usually means you’ve managed to sell a bunch of units and/or lease a bunch of space. Some developers (with enough scale) will have a construction team in-house, but many others will just outsource it to a 3rd party. Regardless of the setup, it once again helps to have a technical background.
If I missed anything or you want to add more detail, please let me know in the comment section below. I’m always happy to receive questions and post ideas, so feel free to tweet or email me. Tweets will almost always get a faster response.
Venture capitalist Chris Dixon recently published an interesting post called, Two eras of the internet: pull and push. In it, he describes two patterns that have emerged within the internet over the past decade and a half.
Pull (2000s):
Pull is when you are seeking information, usually an answer to a question. You want to know the closing time of a restaurant, the description of a hotel where you are thinking about staying, the details of an historical event you heard about, etc. You go to your computer and pull the information. The killer app for pulling information was Google.
Push (2010s):
Push is when you are using the internet in a more passive way and content comes to you. The killer app for push is social networks, the most popular being Facebook. Information is pushed from user to user via likes, shares, tweets, etc. People tend to push things they find funny, interesting, moving, outrageous, etc.
Now let’s think about this for a second, because it’s a pretty significant change.
Google’s mission is to organize the world’s information. And they have certainly made it easier for us to get the information we want. Instead of physically searching for something, you just type in a few keywords and it pops up. But, it still involves us deciding we want something and then pulling the information.
What’s fascinating to me about push is the idea that content and information comes to you. And it’s one of the reasons that I’ve always found Foursquare more interesting than Yelp – even though Yelp is far more popular as a tool to help you find somewhere to eat, drink and so on.
When I walk into a restaurant or bar now, oftentimes I’ll see a Foursquare notification popup on my phone showing me a tip that somebody has left: “Try the meatballs – they’re to die for”. I didn’t search for that. I didn’t ask for a recommendation. But Foursquare knew where I was and presented me with that information.
Now, there are obviously potential downsides to constant interruption, but let’s focus here on the opportunities. How could these same principles to be applied to other industries such as, say, real estate?
I think there’s a pull and push parallel.
Today MLS operates in a way like a search engine for homes. You decide you might be interested in buying a home and so you go online and start pulling listings.
Of course, the vast majority of people also work with a real estate agent. And in a way they’re kind of like your push. They get to know you, they figure out what you’re looking for, and then they push relevant listings and information to you.
And maybe that’s why nobody has killed off real estate agents – despite the numerous attempts. Everybody has been focusing on new pull platforms (listing platforms) as opposed to a new push platform.
Who knows.
But I think it would be naive to think that these emerging push platforms won’t reach far beyond social media.
Yesterday Opendoor.com finally launched their product in Phoenix. If you’re a regular reader of Architect This City, you might remember that back in July of this year I wrote about how they had just raised $10M of funding to make selling your home as easy as a few clicks.
Well, since then, I’ve been following them like a hawk. I had all the founders on Twitter notification (so I got notified every time they tweeted) and I was eagerly anticipating their launch.
Now that they’ve launched, we have a much better idea of how their business model is going to work. I say “better idea” only because there’s still portions of it that are a question mark for me.
In any event, Opendoor basically provides instant liquidity to homeowners. You go on, tell them about your home, and they then make you an offer to buy, which looks like this and lasts for 3 days. The offer they make you is calculated using comparable sales and adjustments based on your home’s unique characteristics.
Upon accepting their offer, they then schedule a home inspection (at their cost) to confirm your home’s condition. Once this is done, you just select your move out date and Opendoor handles the rest. The fee for all this is 5.5%, which the company claims is less than the 6% that realtors typically charge (this would be high for Toronto).
After buying your home, Opendoor plans to turn around and resell it.
What this reminds me of is a “bought deal.” In the world of investment banking, a bought deal is when the bank itself agrees to buy the entire offering of a particular security, as opposed to going out to the market and trying to raise the money. The advantage to the company (offering the securities) is that there’s no financing risk. They know they’re going to get their money. But it usually means the company gets a lower price.
So what I wonder, is if this is what’s going to happen here. Since Opendoor is effectively taking on the selling risk, does that mean their offers will be lower? Or are all their costs built into that 5.5% and that’s truly their core business model? I’m sure some of this will surface in the coming weeks.
I do, however, think they are smart to be focusing on the supply-side of the marketplace and offering virtually perfect liquidity to homeowners. Real estate is a unique asset in that it’s difficult to bring supply to the market. And so if control the supply-side, I think you have a pretty good shot at controlling the market as a whole.
