Managing Real Estate Investors
Managing Private Real Estate Investors:
Both real estate and raw land development are tough undertakings but the reward can be worth the risk. Similarly, managing your investors can be a tough undertaking if objectives, project cost and time-to-completion are not handled the right way. Even when they are handled correctly investor relations can get choppy at times.
Successfully managing investors can have a lot to do with managing their expectations, in addition to their invested assets. During my decades in land development working for private investors, I’ve found at times that it’s easier to manage their assets than their expectations.
Investors who are already owners:
Sometimes the investors come along with the dirt since they are already owners of it. They want you to do the development work and that was how I started. In this case the investor came not only with the land, but also with a firm vision on what it would be developed into. There had been some conceptual plans drawn up but no applications submitted yet, so we were years away from any final plat approvals.
No matter, he had the finish line firmly in his gunsights and his intention was to make buckets full of money - quickly. I was a true rookie and quickly signed on for the task, but if I knew then what I know now, I would have handled a few things differently. Those things revolve around my initial willingness to buy off on some of the investor’s expectations.
Hope vs expectations:
When you hope for something you have a desire for that something to happen. Conversely, when you have an expectation it is a definite belief that something is going to happen. There’s a huge difference between hope and belief and I’ve found that my private real estate investors tend to move very, very quickly from the hope stage to the belief stage. It may be because the two big money investors I’ve had were both visionary optimists and entirely self made. Why waste time hoping, when you have always proven to yourself that you can make the belief a reality anyway?
Ok so far, but no matter how strong the belief there must be a propulsive force to make it reality. When you are the person that is responsible for the development of the real property, you and your team are that force. Investor money is the fuel, but not the engine my friend. Most of us think of things like hard work, focus, goal setting, strong business management or financial acumen … all good things, but in what direction is all this energy moving? That’s something that needs to be understood and agreed to by the developer and his / her investors up front.
Setting mutual expectations:
I always cast a sideways glance at developers that see their investors as peers - they aren’t. When the investors are putting up the dough you are working FOR them, not WITH them and don’t kid yourself. Proof will be the time that you approach the investors overbudget in money and time and ask for more funds and present a revised timeline to complete the project. Then the true nature of your association will be revealed.
That’s why it is wise to understand and state your own expectations before that business association is cemented. This can help set expectations based on mutual understanding and agreement. You are the subordinate in the exchange, but always remember that you don’t have to take the job or the money in the end.
Even though I was inexperienced with my first investor, I had spent some time with his consultants and knew enough to tell him that some of his expectations were not realistic. Having failed to do that, I had to constantly manage the uncontested and unrealistic expectations for years afterward.
As a side note, that investor was very profitable with his projects but he was never satisfied with how long it took and the process itself. Because I was weak in the beginning by not saying what I knew, I did him a disservice and it never happened again. I went on to work for him for many years and I later found the correct ways of saying no to his occasionally unrealistic optimism.
Investors and financial projections:
I need to be prepared with an initial financial projection for any project and constantly update it based on changing conditions. This is particularly true when a developer is trying to round up investors for a new project. All investors want to get a glimpse of the projected end result and they’ll never forget your opening numbers, so they better be good.
Projecting and then living a real estate development budget reminds me of my junior high school school world history class that covered 16th century Spanish explorers. The goal was wealth and power and the method was - “Spain… then sail off westward to who knows where and who knows what”? Like us developers, the whole point in doing this was speculative opportunity. Also like developers, they were to bring home the bacon at some point (which was almost never exactly when it was supposed to be).
Some made it back with the goods, some made it back without them and some just failed to make it back at all. Consider Ponce de Leon who was looking for the Fountain of Youth around what is now St. Augustine, Florida…it didn’t exactly work out as planned, but nice try on a speculative failure!
To deliver the real estate development bacon and minimize the speculative aspect, it’s important to run good numbers. That can be very difficult to execute. I’ve been way over budget exactly two times, under budget only occasionally and over budget frequently. Consider this before thinking that things were managed poorly: The areas I have found most difficult to manage are time delays and plan revisions in entitlement. Time delays are endemic in the process and delays in real estate development tend to take significant time to resolve. Plan revisions are a regular annoyance and hard to predict in some cases. Time and money to address these two challenges adds up, so it helps to have a line in the budget for contingencies.
Truly passive investors:
I had a situation one time where an investor passed away in the middle of a project, but before he did a trust was created naming some of his family members as beneficiaries. I served a dual role as Trustee and land developer. The details have been explained in this post:
What is a Trustee and What Does a Trustee Do? What Is A Trustee and What Does A Trustee Do? — Land Development Realities
These were truly passive investors. They had no history in land development, no high risk profiles for the undertaking either individually or as a group, and were not wealthy people that could just sit around patiently. But patiently wait they did! I am truly grateful for their trust in both the process and me. But this is not necessarily what a developer will find when an interest in a large project is passed on to heirs in an estate or beneficiaries in a trust. A developer that winds up with owners who are not the original investors cannot predict the personalities and tolerance of the new investors. That can mean problems.
What can a developer do to handle this?
I am a huge advocate of estate planning and having a Will with the necessary attachments to handle all estate and personal interest matters. Two ways I try to handle succession possibilities with investors is to incorporate a Buy / Sell Agreement into the company formation documents, so that if an investor passes away, provisions are in place to either buy out the interest or to identify who can be the successor in that interest. The other one is for investors to have a current and regularly updated Will for their personal estate interests, drafted by a qualified estate planning attorney.
I wrote two articles early-on and both of these are some of my least read posts, which kind of tells me just how much people don’t like to even think about death, estate planning, or succession interests…but here they are anyway:
Do I Need A Will? Do I Need a Will? — Land Development Realities
Co-Ownerhsip In Land Development: Co-Ownership in Land Development — Land Development Realities
Managing Real Estate Investors:
There are some developers that will take any dime offered no matter what the conditions are. I am not one of those guys since I have lived through many projects with different kinds of investors and varying expectations. I said earlier that even though the investors are the true boss in a project, I always remember that I don’t have to sign on for the job or take the money if the fit isn’t right. Think about it and Good luck!
Contact me at: ldr@landdevelopmentrealities.com
Blog photos courtesy of Unsplash.com - Austin Distel, Icon 8 Team, Sebastian Hermann - Thank you!
