Risk Tolerance- Do’s and Don’ts, When and when not.

Risk is prevalent in nearly everything we do. Risk for the most part comes and goes but for a few things, real estate being one of them, risk can be like a prison sentence with long range impacts. Of course, we all know the old saying “no risk, no reward.” In real estate that is certainly the case, but there are ways to minimize and quantify risk.

One of the worst ever risks I have seen in my lifetime was seeing the effects of Student Loans. I believe the people behind that scam should be brought to justice. They lured the herd to slaughter. In my day college was cheap and no one needed loans to finish. I have seen so many kids getting roped into borrowing thousands of dollars with no knowledge of the consequences. Banks gave monies without proper supervision and controls to kids that had no job and merely signed paperwork (no collateral) – we call it an unsecured loan.

Worse yet our government was a conduit to these proceedings. I could not have gotten those terms (nor would I), but millions of kids did, and now they are in their 40’ and 50’s with poor credit and no means to borrow money to buy a house. Even more sad- some without proper college guidance received meaningless degrees that gets them no better employment than if they had no degree at all. As to our topic, that is the “Don’t and the When Not” example all wrapped into one.

Bad Real Estate too. Like student loans, bad real estate borrowing is clearly comparable. People sometimes get into real estate willy nilly and are able to get bank financing for their ill-advised project. They are required to pledge their assets as collateral and agree to repay the loan in full. If you do this the likelihood of failure is great, but worse are the judgements, foreclosures or loss of personal wealth that you saved half a lifetime to accumulate. It also means when the right deal comes along, you will be sitting on the sidelines. These consequences can last for decades.

How can we minimize risk? Risk is always prevalent in real estate development. But good decision making and experience can help reduce risk. For our projects we start by not reaching for over-priced land. We also write our contracts subject to all approvals and won’t close until 31 days after plat recordation (most counties have a 30-day appeal period after final plat recordation). We ask for a money back 60-day period to test soils, meet with the city politicians for their blessing and do preliminary site plans to see if our desired density can be met.

During the approvals we research our product, exam appraisals of similar product in the area, study demographics and shop our competition constantly. At some point before the closing when we are waiting for the second council approval meeting, we begin getting together our sales and marketing materials so we can hit the ground running the day after closing. Experience plays a big role but so does hard work and common sense.

Times can be against you through no fault of your own. Despite all the experience and precautions, on rare occasions you will fail, or at least struggle through the project because of something out of your control. One thing about our business – even if you do things by the letter, events can change your luck. Things like recessions, bank crisis, partner illness and product shortages can foil a success from happening. That is when the Captain must steer the ship through the narrow harbor in order to minimize damage. Risk control = success.

Stephen Gravett has been a real estate developer for over 45 years and was most recently CEO of Kennedy Homes for the past 11 years and is still CEO of Kennedy Development Partners (KDP). He is also full time Director of Operations for 5 Star Developers. He is a state licensed broker and since 1980 a State licensed General Contractor Unlimited. Before becoming a real estate developer, he flew B-52’s in the US Air Force during the Vietnam War.

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