Chapter Nineteen

Method of Operation

There are various ways to enter the Real Estate Development business. The most profitable would entail the complete funding of the project by the individual involved. The rest of them point to that day.

The second best way would include a person with money to invest who teams up with a general contractor, experienced in home building.

This could be a winning combination. For the investor, it would release him of all responsibility, except for providing the money. For the contractor, it would provide a simple method of financing. The proof of capability would lie with the contractor, as would the success of the project.

The disadvantages could include incompatibility between the two and especially the matter of splitting the profits.

Let me point out here that a contractor with sufficient personal funds does not need a financial partner. Also a layman with money to invest need not split the profits with a contractor. If he is willing to take some responsibility, he can hire a contractor at a fixed price and own 100% of each project.

Probably the most difficult way to start is with no capital, no license, no knowledge of the territory and no local connections.

The writer should know, for that is the way he started, with practically nothing but a burning desire to succeed.

I paid a visit to my mother and sister in California and decided it was an ideal place to start a business. The State was growing in population and business in general grew along with it. I was handicapped because, as was said of the "Music Man," I didn't know the territory.

I decided the simplest and most inexpensive way to gain a foothold would be to obtain a real estate salesman's license. This I did and joined the sales force on a large tract of new homes.

I discovered there was considerable preference difference between young married couples, married couples with children, middle-aged people and those of retirement age. For example, many older people drove up to our office door and without getting out of the their cars, they shouted, "Do you have any two bedroom, one bath houses?" When we shook our heads no, they drove on.

I spent considerable time watching the construction of the houses, from the ground up. I learned much about competitive California methods.

One morning an old German carpenter stopped by our office. He had applied for work on the tract, without success. He had a general contractor's license and left his card with me in case I came across someone who was interested in building. He lived about 50 miles from the Bay Area but said he would go anywhere to find work.

That very afternoon I had a conversation with a man from a nearby town, who was about to retire. Although he was only middle aged, he had developed a bad heart condition.

He intended to have a small retirement home built in the suburban area. In fact, his plans were complete, and he had procured a Building Permit.

He was looking for a builder, and his only requirement seemed to be that the guy should have a State license. I told him I thought we could do business together. I said I didn't carry a license myself, because I didn't need one. I had an associate who had been licensed for years.

The upshot of the conversation was that I drove to his home that evening and looked over his plans. I gave him a price, which he thought was fair and agreed to accept.

He said I could start work anytime, and I suggested that we get it down in writing. I sat at his dining room table and wrote out the contract. Among other things, I guaranteed to work with a State license and he agreed to advance money, in five payments, as work progressed.

When I arrived home, I called the carpenter and he said he would work for $100 per week. Most importantly, he assured me that his license was valid.

The following day I went to look over the building site. It was just 49 miles from my front door. I called on the owner of the local lumberyard. He offered to give me credit for any materials, provided I pay him in full out of each payment I received from the owner.

This was a Saturday. I was ready to go to work on Monday morning. This was another step toward my goal. I was now in the Construction business. I told myself that I would never need my real estate license again.

The work went smoothly and I finished the contract in good time. The total amount involved was $4,500 and when all bills were paid, I had a profit of $1,500, which included the work I performed.

I realized I would need a General Contractor's License in order to be completely independent, and I studied nights for the examination. During the day, I drove around looking for a site that I could afford to purchase. I intended to build a house on speculation.

I found a good lot, which the owner wanted to sell for $1,500. He also had a set of plans, which he included at no extra charge. I managed to secure a construction loan, which was good for one year, after which it must be paid off or converted to a permanent loan.

About two weeks later, I passed my test and became a licensed General Contractor in the State of California, which meant I could contract any type of construction work, except engineering projects. I was on my way.

At this point, I want to emphasize the fact that it is not necessary to be a contractor to be a part of the real estate development business. In fact, it is much simpler if you have the work done by contract.

I procured a license because I wished to be an active participant. It meant that I was responsible for all material purchases, required insurance, deals with subcontractors and every other related matter. A mere investor would eliminate all that.

Copyright ©1995 Robert A. MacDonald, All Rights Reserved.
Last revised: May 10, 1998.