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Market uncertainty and obstacles in the development process posed by COVID-19 have made securing a real estate development deal more challenging than ever. From high inflation and unstable cap rates to unpredictable costs in the construction process, many factors can derail an important deal. Successful real estate developers need to be able to dodge pitfalls in the market through due diligence, risk mitigation, and strong relationship-building with stakeholders.
Deal-making is important to your business, allowing your team to identify key opportunities in the market and remain competitive. The ability to successfully close a deal can also boost your reputation in the industry, demonstrating your reliability and expertise. In turn, you’ll be able to secure financing from investors, banks, and other lenders more easily. There are many strategies and tools you can rely on in the deal-making process, from fostering a strong understanding of market dynamics to relying on modern real estate development software to create accurate budget forecasts in pre-development.
Let’s explore the key strategies you can use to effectively close deals and ensure successful projects.
Financial and Due Diligence Factors
Development teams can face major pitfalls in the pre-development or construction process if a project turns out to have inadequate financing. Ensuring your financing covers land acquisition costs is vital, as coming up short could make a project untenable from the start. Financial concerns can also arise in the construction phase of a project, as funds will need to be sufficiently allocated for materials, labor, and permits. If you have to scramble to secure additional financing or find other ways to cut costs, it can cause inevitable project delays, and imperil your deal.
Before closing a deal, you should undergo a due diligence process with a thorough legal, financial, market, and physical assessment of the property or building site. By doing so, your team will be able to identify obstacles that need to be addressed prior to finalizing a transaction. Comprehensive due diligence processes often include preliminary zoning studies to determine the best future use for a property, construction type (wood frame, concrete) and associated hard costs, environmental and geotechnical assessments, and a title search to determine any potential easements, zoning restrictions, or property boundary issues. By gaining key insights and information from the due diligence process, you’ll be able to enter the deal-making process with confidence.
Modern real estate development software can help you control financial factors, forecasting budgets with accuracy, and leverage historical cost and vendor data to make more informed assumptions around building costs. You can also create and manage multiple budget scenarios with different planning and design considerations, eliminating version control issues and offering reliable financial predictions. Once you have a clear idea of the property’s potential and ability to deliver returns, you can close your deal without risking major overruns or other financial obstacles.
Navigating Market Dynamics and Regulatory Challenges
The current uncertainty in the economy is making project outcomes more difficult to predict and deals more difficult to close. You can improve your odds by conducting a thorough market analysis at the start of the development process. It’s essential for you to understand key supply and demand dynamics in the industry at large and for the region you’re looking to build in. For example, high-density mixed-use properties are gaining traction in urban areas, while office space remains the most imperiled asset class.
Technology can help you gain a better understanding of how much you should invest in a property in a given market. Northspyre’s DeepLook tool can help you determine what your project should cost, leveraging historical data from $125 billion in worth of projects to give you an estimate based on location and asset class, among other factors. By leveraging the functionality of the tool, you can work off more than a gut feeling when it comes to market predictions and move forward assuredly in your deal negotiations.
Financial pitfalls caused by a lack of market understanding can have a snowball effect, leading to timeline delays and regulatory concerns. Lack of funding can mean your team will be unable to hit payment deadlines and stay aligned with construction codes and regulations. Negotiating regulatory or zoning issues in the middle of the project can further complicate timelines and potentially tank your deal.
Being up to date on regulatory practices can also help you overcome hurdles in the deal-making process. In most cases, local planning boards set regulatory and zoning requirements and make this information available to the public. Building positive relationships with local officials, planning boards, or zoning authorities can also help you get in line with planning ordinances.
The Importance of Efficient Real Estate Negotiations and Expertise
Drawn-out real estate negotiation processes can stall a development project, resulting in missed opportunities, increased costs, or investors pulling out due to uncertainty. In addition, prolonged negotiations can diminish interest and enthusiasm for a project among stakeholders and allow competitors to make a more appealing offer. Ensuring your negotiations are efficient and backed by industry expertise is vital for your business’ success.
To boost your negotiation skills, several key strategies may be useful. Know the other party’s goals before entering into negotiations. If an investor is interested in pursuing large residential projects, highlight why your residential property would stand out in a given market. In addition to meeting the other side’s needs, you will also show that you’ve done your research and want to accommodate the party in question.
Expertise in the real estate development industry is essential to closing a development deal. Invest time and energy into becoming an expert in your market before entering the deal-making process, including the demographics of the relevant city or county, the existing availability of properties, and property costs or values. Finding the right location, committing to a niche, and having a well-defined market strategy can help you act in an informed and decisive manner in your negotiations.
Adapting to Economic Changes and Managing Projects Effectively
The real estate market is cyclical, and it's your responsibility as a developer to account for economic turbulence. High-interest rates are expected to stick around for a while, which can potentially raise building costs and make investors more hesitant. Your team must be ready to successfully navigate turbulent economic conditions to prevent timeline delays and project overruns. Bringing down vendor costs upfront can help you prevent overruns and other needs in the long term.
Teams running efficiently will be able to weather macroeconomic shocks and can demonstrate efficiency to investors or other financial partners to secure funding even amid less-than-ideal market conditions. Emerging real estate development software uses automation, data analytics, and proactive intelligence to ensure that budgets stay lean and timelines are met.
When your project management team is operating in the most efficient manner possible, your business will be better prepared to withstand downturns. The ability to navigate economic changes without causing timeline disruptions will prove valuable in the deal-making process, preventing unforeseen market conditions from getting negotiations off-course.
Real Estate Risk Management and Relationship Building
Real estate development software can help you both mitigate risk and maintain strong relationships with stakeholders. Northspyre’s proactive warning feature can help you identify budget overruns, contracts overspent, or other financial concerns before things get out of hand and derail your deal. Real-time dashboard updates can also help you boost transparency across your organization, allowing investors or other stakeholders to see budgets and timelines. These real-time updates can help bolster your reputation with stakeholders, demonstrating your aptitude for real estate risk management and to deliver projects under budget and on time throughout the development cycle.
If you’re looking to improve your deal success rates, investing time into thorough market analysis and due diligence procedures, cultivating positive relationships with regulatory stakeholders, and the ability to keep projects on budget and on time are all essential. Technology can play a major role in your deal-making process, helping you forecast budgets more accurately, operate with a leaner team, and cut costs as early as pre-development. Northspyre’s can act as your all-in-one command center throughout the deal-making process, helping your team close quickly and successfully.
Download our white paper on Why 70% of Real Estate Project Delays Happen Before Construction Begins for additional insight on how you can keep development timelines on track.
Tag(s): Real Estate Technology
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