I met J. when he worked as a marketer for a company to which our office provided services. After about two years working with them he decided to go out on his own and become a developer himself. A few months later he asked to meet and present to me the new project he was initiating, so that we could accompany him. It was an abandoned building within a short walk of the center of a European capital, in a neighborhood that is being rehabilitated and becoming trendy among the local hipsters. The idea was to buy the building, split it into studio apartments, renovate, sell, and contract a management company to manage the apartments for the buyers.
I started pressing J. with questions, to try to understand how far the idea had taken shape and matured. J. was missing a lot of data that seemed important to me, but I was impressed by his passion and determination. J. planned a trip, and asked me to join him, in order to meet local architects, engineers, the owners of the property and their lawyers. I tried to explain to him that he was at a preliminary stage and that there were more checks to be done before we entered negotiations and the legal due diligence, but he was enthusiastic and determined to sign an option agreement with the owners and start running ahead.
Through his connections J. arranged several meetings, and the local office we cooperate with also arranged several meetings with professionals who could serve as J.'s local hive. After two days of meetings, we sat in the hotel lobby in the evening. The next day a meeting was scheduled with the owners' lawyer.
J. was much less enthusiastic at this stage, because the data we received from all the professionals we met presented him with a picture completely different from the one he had formed at his desk in Israel. The architects and engineers we visited the building with presented costs much higher than he had planned and/or expected to hear. The morning meeting with the architect chosen by the municipality revealed to him that the municipality's requirements for allowing the split into apartments would cost him quite a lot. During the evening we played with Excel and tried to build a business plan and understand what the gaps were and how viable the deal was, in order to understand how to conduct the next day's meeting with the owners' lawyer.
J. did not buy the building. The economic feasibility check of the deal, after all the meetings we held, pointed to extremely low profit margins that could have exposed him to losses.
In a conversation we held after returning to Israel, we did a retrospective analysis of J.'s conduct. We looked at the information he had when he sat in the room and checked the economic feasibility, his sources of information, and his way of thinking. We mapped the gaps and, above all, I reflected back to J. his eagerness, which led him to make assumptions and to incur unnecessary expenses (yes, my trip abroad and the several days' stay were not cheap) at a stage when, with more experience and caution, he could have ruled out the deal from his desk in Israel. We reached the conclusion that in any future venture and/or project J. will apply a preliminary screening in 3 stages, which I recommend that every developer apply in every project:
Stage A - Economic feasibility check
Building a business plan on an Excel model that checks all the numbers as precisely as possible, including all the project's expected expenses against the expected income. The data on both expenses and income are verified with several sources (do not forget here the matter of taxation, or the project's management expenses, including flights and the stay of the developer and/or his representatives on site). If the plan confirms that all the assumptions are conservative enough and that the deal has profit potential, you can safely move on to the next stage.
Stage B - Planning and physical check
A visit to the intended property and meetings with architects and contractors; checking the building rights (if any) or the options for developing and enhancing the property; reviewing similar properties sold in the area of the property that interests us, effectively checking the price per sq.m., in order to see that the purchase price is indeed attractive. There is further data to take into account, such as timetables for obtaining the permit, construction, sale and more. Only if we have reached the conclusion that there is planning feasibility can we safely move on to the next stage.
Stage C - Legal check
The details of the deal pass to the accompanying law firm (preferably with the accompanying lawyer drawing on a local law firm for this purpose), which examines the property's history and its current legal status, to see that the property is free of any lien or debt, prepares the legal agreements for the deal and accompanies it up to the agreement stage in which the property is purchased.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית