- The shortage of housing inventory for sale is persuading some agents and brokers to get into real estate development.
- Finding a mentor or partnering with a developer or contractor is a smart way to get started.
- Brokerages can participate in the trend by adding developer services to their company offerings.
In a normal year, Grant Johnson, a real estate agent at RE/MAX Results in Minneapolis–St. Paul, Minn., divides his time equally between selling existing homes and developing land for new- home construction. But the pandemic has flipped Johnson’s business on its head.
“Listings have been very difficult to come by,” says Johnson. As a result, he decided to scale up his land development work. “Typically, the builder that I work with and I put together 20 to 30 lots a year,” he says. “This year we’re going to be developing 70 lots.” In addition to procuring the land, Johnson will represent the builder as a listing agent. “Creating our own inventory has helped us survive the pandemic,” he says.
Diversifying business streams amid a period of record-low inventory has been a productive move for Johnson and many real estate agents and brokers this year. National Association of REALTORS® Chief Economist Lawrence Yun says, “2021 is likely to have the most acute shortage of homes for sale in history.”
The numbers make the urgency clear. Unsold inventory remains scant, hovering at a two-month supply during the first half of the year. In April, days-on-market was the shortest ever recorded at 17 days, down from 29 in March 2020. The typical listing received more than five offers, April’s REALTORS® Confidence Index survey found.
In June, NAR published a study titled “Housing Is Critical Infrastructure,” showing that the U.S. has underbuilt its housing needs by at least 5.5 million units over the past 20 years. To fill that gap, the report says, the country needs to build at least 2 million units per year for the next decade, a 60 percent higher production pace than in 2020. Dan Lesniak has witnessed the dearth of home supply in Washington, D.C. Lesniak, founder of the Orange Line Living Team, says homes in his market are getting snatched up in the blink of an eye. “Some of our buyer clients are getting frustrated, because they’re striking out on home after home,” he says.
To cope with the shortage of existing homes, Lesniak and his business partner Sunil Saxena, a general contractor, have doubled down on their condominium construction projects during the pandemic. “It’s given us another revenue stream, and it’s given our home buyers access to more properties,” Lesniak says.
Brandi Pearl Thompson, a real estate agent at Keller Williams Realty in Chattanooga, Tenn., recently began building new homes. “Right before the pandemic I partnered with a local contractor, and we purchased seven lots,” Thompson says. So far she has built and sold eight single-family homes on the land, and she’s planning to start developing multifamily housing. “That’s the next stage of growing the business,” says Thompson, who also flips houses.
It’s not only individual agents who are recognizing the value of branching out. Luxury real estate brokerage Harry Norman, REALTORS®, in Atlanta launched a new developer services division in April, which provides marketing, sales, leasing, and advisory services to residential builders and developers. “We help developers locate land and assess whether a piece of land would be a good place to build homes,” explains division head Leslie Johnson (no relation to Grant Johnson). “We also help them decide what kind of homes to build, what price point to set, and how to market the homes, and then we serve as the listing agent.”
Leslie Johnson says the development operation rolled out at precisely the right time. “It’s hard to believe just how bad the lack of inventory is right now,” he says. Four to six months of home supply is generally considered a balanced market. “We have about one month’s supply of homes for sale here [in Atlanta], which is unheard of,” he says.
People who are renting from us are people who sold their homes but can’t find a place to buy.
Marianne Bornhoft, a real estate agent at Windermere Manito in Spokane, Wash., and her husband Chris Bornhoft, a developer, have also had good timing. “We recognized that the housing shortage was bad for new multifamily housing in Spokane a couple years ago, so we decided it was a good time to invest in building and managing an apartment building,” Marianne says. They purchased a vacant lot and built a 12-unit rental building; the apartments rent for between $1,500 and $1,650 per month. “People who are renting from us are people who sold their homes but can’t find a place to buy,” Marianne says. “They’re displaced sellers, which is not uncommon in today’s market.”
But as first-time multifamily developers, the Bornhofts have experienced growing pains. “We initially expected the project to take about a year,” says Marianne, “but it took over 600 days to complete.” The delay, in part, came because they were forced to hire a second contractor, after the first one dropped out midway through construction. “We’ve had some challenges, but we got through them,” Marianne says. “It’s been a real labor of love.”
Of course, the ability to adapt business activities in the face of market realities is important for anyone to prosper in real estate. During the Great Recession of 2008, for example, many real estate pros pivoted to develop expertise in short sales and foreclosures. For many Black brokers and agents, having multiple revenue streams, including from development projects, has long been key to success in real estate. Some say it’s because of subtle but entrenched biases against their businesses and neighborhoods, whether from lending policies, clients, or other practitioners.
“On a good day, a Black broker who is largely servicing the Black community is going to have a drastically lower income from sales simply because the homes that they sell are priced lower compared to other areas based on the color of the residents,” says Matt Difanis, a White real estate broker at RE/MAX Realty Associates in Central Illinois, who leads talks on housing discrimination.
Still, Difanis points to a silver lining. “This discrimination has led to the remarkable adaptability of Black real estate agents and brokers,” he says.
Bonita Harrison, broker-owner of KBM Realty, a real estate investment firm in Chicago, has offered a diverse range of services since she opened her company in 2006. A longtime rehabber, she says the pandemic accelerated the demand for development projects. “With interest rates dropping as low as they did, we’ve received exponential interest from buyers for our properties,” says Harrison, who flips single-family and multifamily homes on Chicago’s South Side.
In Harrison’s world, discrimination isn’t a thing of the past. “Because I’m a Black female developer, I’ve received racist and sexist comments from other industry professionals. I had one HVAC inspector work on a property I was rehabbing, and he was very demeaning toward me. He didn’t believe I was the developer of the property. I’ve also had buyers question whether the quality for my work is the same as that of my White counterparts.”
Despite such challenges, Harrison says her business is flourishing. “In this low-inventory market, we’re getting multiple contracts on homes even before I’m finished remodeling them.”
As Yun, NAR’s chief economist, sees the situation: “Because of the housing shortage, any inventory that can come to the market, whether it be newly built homes or refurbishing uninhabitable homes, is a potential money maker.”
Getting Started as a Real Estate Developer
Whether you’re planning to build new homes, flip houses, or develop land, taking these steps will help you get your side hustle off the ground.
Land development, home building, house flipping—no matter what side of real estate development speaks to you, the time may be right for you start a side business in one or more of these potentially lucrative gigs. Here is a step-by-step guide to breaking into real estate development, with tips from real estate agents and brokers who’ve done it successfully.
Build Your Network
Real estate development is not a one-person job. To get things done, you’ll need to assemble a team of trustworthy and experienced professionals, such as contractors, architects, and land surveyors. “You have to find a builder that you jibe with,” says Brandi Pearl Thompson, a real estate agent in Chattanooga, Tenn., who got started building homes during the COVID-19 pandemic. “Constructing homes is a partnership between you and your builder.”
Find a Mentor
Grant Johnson, a real estate agent and land developer in Minneapolis–St. Paul, Minn., says enlisting a mentor is the best way to learn the tricks of the trade. “My mentor had been doing development for over 40 years,” he says. “He taught me everything I know.”
Research Investment Opportunities
Scout out undeveloped land or outdated homes to locate potential investments. Johnson suggests starting small. “Start out by finding a teardown, and work with a builder to construct and sell a new home,” he says. “I think that’s the best entry point for agents who want to break into development.”
Need capital? Meet with real estate investors to find a business partner who can fund your first project. Before you meet with people, figure out how much cash you’re going to need. The average construction cost of a typical single-family home is $296,652, or about $114 per square foot, according to a recent report by the National Association of Home Builders.