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# Real Estate 101
- URL: https://www.smdp.com/real-estate-101/
- Published: 2008-04-16T15:00:00.000Z
- Updated: 2026-10-24T23:53:53.000Z
- Author: Guest Author
- Tags: Opinion, Santa Monica, #archive-import

*By Mike Heayn Major profits often come with major risks*

I WAS DRIVING AROUND THE SOUTH BAY the other day with a friend and she turned to me and said that the construction project on “X” Street was on hold. I asked how she knew and she said that she used to see a plethora of people working in the mornings on her drive to work and then noticed no one working one morning. After that, she said it has been a ghost town. To confirm, I went to the Web site, where the company said they were timing the market for new homeowner-ship opportunities. I am not really sure what that means, but I would guess the company is having financing problems.

How great would it be if you could use someone else’s money to buy an asset and make money? In essence, that is what real estate investors, builders and syndicates do. Since most real estate projects — such as a condo development — take large amounts of money, the developer will go out and find financing to get the project started. An owner or developer can go out and borrow money from a bank through a bank loan, or go to private sources offering the investors a set return on the money along with a portion of the profits.

Kevin, a developer, wants to build six condominiums on a piece of land his family has owned for years. The land already has a condominium map approved by the city and Kevin’s father began the work a couple years before, but got ill and stopped the project. Now Kevin has an opportunity to finish the project, but needs more money. He goes to four investors and asks each of them to invest $420,000\. Along with Kevin’s $450,000 the total amount raised is $2,100,000\. With years of experience, Kevin knows it will cost him $350,000 per condo to complete the construction of the project. Kevin estimates the completed values of the condos to be $600,000, leaving him with a gross profit of $1,500,000\. He tells his investors that each will receive a 10 percent return on their money or $45,000, plus 10 percent of the gross profit or $37,500\. It costs Kevin $330,000 to borrow the money, but he is left with a profit of $1,170,000\. What happens if the real estate market turns?

Sure it is easy to say that Kevin is going to make out like a bandit, but you have to keep in mind the risk Kevin is taking on. What if the project costs more due to a spike in building materials or the real estate market turns for the worst? Both scenarios are possible. If the real estate market turns and banks make it difficult for people to purchase new homes, Kevin could be stuck with the project for several months. Selling the condominiums at a fire sale would free Kevin from the project, but leave him with little or no profit. That is part of the problem with developing a site, the risk is great and so are the profits and losses.

Going back to the project in the South Bay, I’m sure the developer ran into liquidity problems — either the bank will not release any more money or the money has run out from private sources. Once a project stops, it is unlikely for it to continue with the same development company as a developer makes money on the sale of the units or property, not holding it like an investor. The South Bay project will continue and the condominiums will be sold, most likely in the future after the real estate market recovers.

MIKE HEAYN is a Washington Mutual Multi- Family Loan Consultant. He (310) 428-1342, or emailed at

*Originally published in the Santa Monica Daily Press print edition on April 16, 2008.* [Read the original PDF.](https://s3.us-east-1.amazonaws.com/smdp%5Fbackissues/041608.pdf?ref=smdp.com)