Smart Investors Follow Developers They Trust for Best Price, Pick of Inventory and ROI

Smart Investors Follow Developers They Trust for Best Price, Pick of Inventory and ROI

Read the PDF version »

Market cools in Beijing, Qatari royal buys in Manhattan and more news from around the world

When Witkoff, a Manhattan-based real estate investment and development firm, was ready to start selling pre-construction units in its 111 Murray Street project in Tribeca, they offered previous buyers from its West Village and Madison Square Park projects the chance to get in first.

These “friends and family” buyers, as brokers who sold the projects call them, got a few perks for their loyalty: the best price on units before scheduled increases occurred, and their pick of inventory before it started moving.

“If you’re in first, you could see prices go up by 30% before the building sells out,” said Darren Sukenik, a Douglas Elliman broker who worked on all three Witkoff projects. “That’s a benefit to getting in early, especially on A-plus developments that sell out quickly.”

Among those who purchased a unit in 111 Murray first was Randi Liebenthal, an agent with Town Residential and a longtime real estate investor, who also rents out the two-bedroom condo she bought with her husband in Witkoff’s 150 Charles project for about $15,000 per month.

While the Liebenthals picked up a $7-million three-bedroom unit in the Tribeca building, which is now 70% sold and will be completed early next year, they also brought in some friends, who they told about the quality, amenities, professionalism and unit appreciation that came with buying in a Witkoff development.

Another Witkoff loyalist, who purchased four units at 10 Madison Square Park West picked up another four early units in 111 Murray, too. In total, almost 10% of the $2.45 billion in sales that will be generated by the three projects—or $228 million in total—will be from buyers who own in multiple Witkoff buildings, said Lauren Witkoff, the company’s executive vice president.

This investor loyalty makes good sense, said Gary Gold, executive vice president of Los Angeles’s Hilton & Hyland, a real estate brokerage in Beverly Hills.

“If you’re doing something and winning one time after another, you’ll want to continue winning,” Mr. Gold said. “So, it goes without saying that if you’re making money when you invest with a developer and are happy with the relationship, there’s no reason to go anywhere else.”

Typically, this approach of following a developer from one project to another comes in a few varieties, of which this Witkoff example fits into the first: buying a unit or units in a new development early, thereby getting the best price, and either using those units, renting them, or re-selling them for a profit.

While this strategy can work well for a buyer, it also works well for developers, said Dan Kodsi, a real estate developer who’s currently working on the Paramount Miami WorldCenter project downtown.

“Initially when you’re starting a project, you want to have those go-to buyers that you know are going to buy pre-construction,” Mr. Kodsi said, because these sales show the project will likely be successful—essential for securing financing.

When it came to launching the WorldCenter project, which will be delivered in 2019, he relied in part on satisfied buyers from the Paramount Bay project in Miami and Paramount Fort Lauderdale Beach project to follow him, and the brand.

A comparison of rendering and construction images of Paramount Fort Lauderdale Beach
Courtesy of PARAMOUNT Ventures

Some of these Paramount brand loyalists have inquired about taking on a new role in future developments, and asked about making a more significant investment and becoming equity partners, said Peggy Fucci, the CEO of Miami-based real estate consulting firm OneWorld Properties, which is working with Mr. Kodsi on WorldCenter.

“We see that there’s an appetite for this type of diversification,” Ms. Fucci said, particularly from people who are interested in the future of the Paramount brand, and want to take advantage of unit appreciation, but don’t want to manage renting out multiple units in the building. Now, the challenge is to figure out a way to make this work from a business perspective, she said.

Other experts said they’ve seen this phenomenon, too, and this progression or graduation from investors purchasing individual or multiple units early in a new project, and betting on the building’s potential, to looking to invest directly with the developer, and put their faith in his or her work or the brand.

One place where developers are happy to work directly with investors and form a business relationship is in Los Angeles, where there are hundreds of spec builders who need capital prior to construction, Mr. Gold said. He noted that this is a very different investment model, one that likely appeals to a different type of investor, who’s more interested in forming a long-term relationship with a developer than managing and re-selling property, like the person buying early inventory.

“When you’re giving money to a developer, you’re going into business with that person, and it’s an immediate thing,” he said. “You’re putting money in, and when you sell the house, you’re either getting a return or not getting a return.”

These relationships often start via word of mouth, or when a business manager introduces a client who’s looking to diversify their portfolio to a developer. Before that developer can start building, they typically take out a loan for a portion of the cost and pay the balance in cash, some of which might come from this investor, or silent partner.

Once the project is complete and returns come in, the investor typically has a preferred return, where they get their money back before the developer takes a cut, and then they split the profit. In some cases, that might mean a 15% return on investment for a project that’s $3 million to $5 million in a neighborhood where there’s a natural market, or much more for a spec build that’s $30 million to $40 million, where there are more variables at play.

“Whether it’s commercial or it’s residential, if you find a guy that you’re having success with and you trust him, you’re not going to stop playing that hand if you’re intelligent,” Mr. Gold said.

The only downside of this type of arrangement is that if an investor trusts a specific developer who they’ve had luck working with in the past, there’s no guarantee that the returns will continue.

While these models are different, experts agree that they both come down to an investor’s desire for certainty, and knowing what to expect.

It’s why Witkoff is already hearing from past buyers chomping at the bit to purchase in their as-yet unreleased residential units in the new Edition Hotel & Residences project across the country in West Hollywood. While formal sales for the 20 Witkoff units are supposed to start in September, Ms. Witkoff anticipates they’ll offer some to friends and family a few weeks earlier.

As to why their buyers are so loyal, Ms. Witkoff said it’s straightforward. “Our buyers see a good return on their investment in prior developments, and can trust in the quality of our work,” she said. “We have a successful formula, and with each project, we take the design and amenities to a new level.”