“Of course you have to pay a lot, you will earn even bigger profits” | Ilias Papageorgiadis’ blog for Real Estate in Romania (and not only)

“Of course you have to pay a lot,
you will earn even bigger profits”

Monday, July 12th, 2010

part 2 of the post “Do you like “role games”? Let us play the… residential developer
To read part 1, please press here

Mr X is a serious successful medium size developer in his country. After having heard so many people talking about Romania, he decided to come over here and invest as well, targeting bigger profits than what he could earn at his place (do you know anyone who would come here in order to earn less?). Until to reach his first transaction, 7 months after he first came in the country, he already had invested:

First phase’s figures:

Total investment in money: 4.285.000 Euro
Total Investment in time: 80 working days in Romania, plus another 40 he lost back home, in order
to return to his daily routine

Bank loan: 80% of transaction cost, 3.200.000 Euro

Interest rate: Approximately 4%

His own resources (cash): 1.085.000 Euro

His investment’s route

Before (7 months)
85.000 Euro Cash

Investment on land (time: 0)
3.200.000 Loan
1.000.000 Cash

Authorisations and surprises…
He knew that he bought a land where he could build 13.000 sq.m. He paid 4.000.000 Euro for it (plus 200.000 Euro expenses, in total 4.200.000 Euro). As the property didn’t have an approved PUZ (zonal urbanistic plan), he was informed that he should apply for one. He had crosschecked this information by the help of an architect and his Real Estate broker. But as he didn’t pay for this help, he discovered that “things were not as they informed him”. “What do you want? I told you my opinion, I still think you can do it. I was having in mind that you will also be “flexible” with the people you have to”. These were the last words of his “architect friend”, before he stopped answering the phone and he got lost in the… myst of unknown. “But I told you that I will assign to you the whole project, once I will buy the property. You would earn hundreds of thousands, why weren’t you responsible enough to protect me?” he tried to defend himself.

The Real Estate broker had a better excuse: “You know… I have a friend, who has a friend, whose uncle works in an authority. They have a land in the area and they obtained a high Coefficient. In a similar land like yours, they will build 15.000 sq.m. I told you that you will be able to build 13.000 in order to be on the safe side”. “But all the lands are not the same, not every project fits on every terrain”. “Yes? Are you serious? I didn’t know, I am sorry”.

He had to change his strategy. He had paid so far 4.200.000 Euro for a land, where he hoped to build 13.000 sq.m. The cost per built sq.m. would be (4.200.000 / 13.000 =) 323 Euro per sq.m., but with the new standards and his ability to develop only 10.000 sq.m., this cost raised up to (4.200.000 / 10.000 =) 420 Euro / sq.m.! The land would cost him 30% more, calculated based on the built surface of the future blocks he would develop…

(The lessons for Mr X: Verify every information you receive. Not all people are responsible for what they say. Plus many people involved into Real Estate have absolutely no idea about the reality behind the things they speak about)

“Soft Costs” by tough people
Until to find the right people to undertake the project, he lost another 2 months. Too many meetings, too many expensive “tough” people who barely had time to talk to him. Few of them had a decent track record, while the majority was not exactly what someone can call “experts”, they were just waiting for a stupid to assign to them a project and then they would practice their experiments on it. Some of them asked him tremendously high prices and big advance payments. When he complained, the reply was simple: “Ofcourse you have to pay a lot, you will earn even bigger profits“. Everyone was sure that he will be able to sell at a very high price, thus it was considered reasonable to pay a lot for every service he wanted. Romanian society had already decided: If you invest in Real Estate, this means that you charge a lot your clients and you have big profits, this is why you have to pay a lot to your collaborators. No one thought that an investor can also lose.

He had to invest about 20 working days in order to reach a new agreement. The company he finally chose was one of the known serious ones, with lots of connections, as they assured him. He accepted their proposal to give them the whole project: All the documentation in order to apply for PUZ, the PUZ work, the rest of the approvals, the studies of architect, engineer, the final authorization to build etc. They promised him that they would finish in 9 months and they asked approximately 50 Euro / constructed sq.m. So for the whole project he would have to pay 500.000 Euro. “We have the right connections, everything will be ok” he heard while he was paying the first advance.

Finally it took him about 15 months to receive all these. He had to invest more than 100 working days during this period, guiding the experts, in order to reach the result he wanted, in terms of surfaces etc.

“In your own country you like living in large, spacious apartments. Who told you that Romanians are inferior and they like smaller surfaces?”
During the period of authorisations, he started working on the other parameters of the project. He decided to collaborate with a “bigger” Real Estate consultancy firm, in order to have a market report. Then he agreed with them to become the “exclusive agents” of the project and sell the future apartments. They took over the marketing campaign etc, plus they had opinion regarding the apartments’ surface.

“In your own country you like living in large, spacious apartments. Who told you that Romanians are inferior and they like smaller surfaces?” “But are you sure that people here are able to purchase large apartments, constructed in an expensive way?” “Who told you that Romanians are poor? Our reports say that…” Then a seminar was ready to start (part of their services). The result was clear: He had to develop apartments targeting the medium upper part of Romanian society. The architects shared the same opinion. His bankers were not so sure about this, but they also didn’t prevent him. In the end he believed himself that this is the right strategy. “Yeah, apartments similar to the ones I develop back home. This is also convenient for me, this is what I am the best in”.

More or less, the total costs for market studies, creation of strategy and marketing campaign, promotional materials, showrooms, internet page and budget for advertisements reached 600.000 Euro, including the minimum commission of the Real Estate brokers. Another one would be added, upon targets achieved. He invested with them about 20 working days, in order to agree upon every detail of the project.

Meanwhile during these 17 months he had also created his office in Bucharest, with his team of people. Apartment, cars, costs for the “country manager” he had brought from his country, airplane tickets etc… Without spending too much, he had reached an average of 12.000 Euro / month. Also, during the first 2 years, he was supposed to pay just the interest of his loan.

Investment in money (services): 1.100.000 Euro
770.000 Euro loan, 330.000 Euro cash

Investment in money (rest): 200.000 Euro, cash
Investment in time: 120 working days, plus another 40 to return to his daily routine back home

His investment’s route

Before (7 months) Investment on land (time: 0)

85.000 Euro Cash 3.200.000 Loan
1.000.000 Cash

After (Authorisations, 17 months)
770.000 Euro loan
330.000 Euro cash
220.000 Euro cash for the loan interest (approximately)

On Tuesday, 13.07:
“For sure you can sell with 2.500 Euro / sq.m., I guarantee to you”
“We don’t negotiate or give to them too much. If you teach them like this, you will spoil them”.
“You should pay the whole amount cash, not in order to receive a deduction in price, but so as to receive a priority in our list of pending projects”

(Necessary clarification
Please allow me to clarify something: I strongly believe that a big part (maybe half) of the residential developers being active in Romania today are people who either were tricked while chasing easy money or they developed on purpose bad constructions, in order for them to cash in more money in shorter time. But for every developer who behaved like this, I also meet one more serious, professional, with strategy and plans. A person or company who tried to develop something good, with respectable quality, civilized, aiming to build a strong brand name and to achieve his clients to be happy for buying his property).

“Of course you have to pay a lot,
you will earn even bigger profits”

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