Everyday, thousands of real estate projects are built all over the world. The odds that those projects become successful is notoriously low. Adding to the financial risks, the developer's reputation is also at stake.
According to the BID (Banco Interamericano de Desarrollo), in Mexico there are 5 million derelict houses (yes, 5 million!) and the number is increasing. In the meantime, thousands of families are searching for a house they can afford to buy or rent, and fail to find suitable properties. So what is wrong in the equation?
The research revealed by the Secretariat of Agrarian, Territorial and Urban Development (Sedatu), indicated that migration, organized crime and violence are causes for which the inhabitants of these houses prefer to abandon them.
The combination of high demand, low supply, and failed developments is absurd if you look at the economics of the equation.
In many cases, developers who failed to commercialize or complete their projects are often clueless about the reasons for failure. They blame the sales department, the architect, the builders, or even the clients for failing to see the potential of the project or being too demanding. The problem often lies in asking the right questions. You can't treat an ailment unless you make the right diagnostic.
You can't treat an ailment unless you make the right diagnostic.
When real estate developments start with spreadsheets that don’t take into consideration the market trends, the nature of our intangible products, and irrational consumer needs, you have the perfect formula for disaster.
Marketing is concerned with getting and keeping customers. The degree of product intangibility has its greatest effect in the process of trying to get customers. When it comes to keeping customers, highly intangible products run into very special problems, especially when it comes to pre-sales.
How can developers stop hemorrhaging money?
The bigger the project, the higher the risk. Big projects involve large lots of land, high levels of investment and many partners. The odds that something can go wrong are against you, and the level of risk for investors is high.
The economics of micro projects
After working for almost 20 years in real estate projects and seeing every possible way that a development can fail, we have come to the conclusion that the development of micro projects is a more profitable and more viable way for the following reasons:
- They can be built on smaller land areas: finding land is difficult and prices are high in highly populated urban areas. Looking for smaller lots with the potential to be build at least six units is a good way to start.
- They require less resources: inviting investors to the game is much easier for small projects. Smaller amounts of seed capital is needed and banks are more likely to lend money for low risk developments.
- They can be developed in months: timing is crucial in a real estate project. The faster you start designing and pre-selling, the faster the project becomes financially sound. Micro projects can be developed in less than a year.
- They can more easily be designed to target a specific market niche that is easier to market to and can command premium prices and higher returns.
- They are achievable: starting and finishing a project of eight units has a much higher probability than one of two hundred. Higher quality standards can be achieved with smaller projects without compromising on profit margins.
- They are scalable and can lead to other similar projects: developing big projects require a huge investment in time and resources and often leave the developers drained. Micro projects can be completed faster and are easier to manage, with more efficient processes than lead to better quality and higher customer satisfaction.
- They can more easily turn into a brand, with scalable models that are easier to market at premium prices, and can be reproduced with higher returns and with improved quality standards and design features.
How can you start?
The first essential step is strategic. You must have a clear vision of the values and the purpose of your core business as a developer to build credibility with your clients. Marketers call it The WHY. A successful branded micro project must be meaningful. It must serve a purpose, a community and the needs and wants of a carefully selected target audience.
The second step is to find a suitable land in the right location that has legal certainty, legal permits, and the potential to develop a project that with a profitability ratio of at least five times the price of the lot.
The third step is to gather the right team for developing the project. Reliable and smart partners are hard to find. you should partner with experienced and reputable associates with a solid track record, and who have complementary skills and compatible goals.
The fourth step is simply hard work, passion and dedication. Great developers are committed to learning and continuous improvement, and take full responsibility for all aspects of the project. Micro projects require personal commitment and getting your hands dirty. Your reputation depends on it.
The last point is integrity. Investment capital and sales revenues must be protected until the project is completed and financially sound. If the project is bleeding cash with costs through the roof, get control of the situation fast and get help from an external auditor to perform a financial diagnostic in order to understand what needs to be fixed before you end up in the red..
Micro projects are a rewarding and highly profitable way to seize niche market opportunities and develop a brand in record time with high quality products. The key success criteria are strategic branding, vision, a highly qualified team and a relentless focus on customer experience and high quality standards.
Once you have developed your own particular brand formula, your reputation will become a future guarantee for investors and clients.