Three Critical Mistakes Developers Make That Can Derail a Residential Development Project

Residential real estate development is a high-stakes business. Managing financing, construction timelines, local approvals, and ultimate sales can lead even experienced developers to overlook critical details that may have costly consequences. Working with developers across Virginia, we’ve seen three recurring mistakes that can slow or sink a project. Here’s what to avoid to set your development up for success.

1. Overlooking Title Issues

Many developers assume that a parcel of land is "clean" once they receive a title policy. However, they often neglect to follow up on the various licenses, easements, and other restrictions listed as exceptions in the title policy. This oversight can lead to discovering utility easements running through planned building areas or longstanding restrictions that limit construction possibilities. It's important to note that other parties, such as lenders, local governments, or state regulatory agencies, may not flag these issues. Instead, they may emerge later from subsequent purchasers or their lenders and vendors. Addressing these issues mid-project can be costly and may delay closing.

To mitigate these risks, carefully review every instrument revealed in the title commitment, especially the exceptions section. Remember, title insurance will not cover you if the policy is filled with exceptions. Negotiate to release, relocate, or vacate any encumbrances before purchasing the land.

Pro-tip: Avoid over-relying on plats to grant or vacate rights. While it may seem “economical” to let the plat handle these legal functions, this approach may not always be legally sufficient.

2. Doing It All

Some developers try to save costs by managing every aspect of community management themselves, including bookkeeping, compliance, and daily operations. However, without professional community managers, developers may overlook crucial tasks that reserve, insurance, and engineering specialists typically handle. This leads to underfunded budgets, deferred maintenance, and dissatisfied homeowners, ultimately damaging both the community's reputation and the developer's brand.

To avoid these issues, hiring experienced professionals early in the project is essential. They provide valuable expertise in budgeting, reserve planning, compliance, and communication with homeowners. With a professional management team, developers can focus on completing the project while ensuring the community's financial future.

Pro Tip: Associations must obtain reserve studies every five years, even while they are still under developer control.

3. Neglecting Association Transition Planning

In projects involving condominiums or property owners' associations, developers often postpone planning for the transition of control to homeowners. When the goal is to sell all lots or units in a community and move on to the next project, it is crucial to coordinate this transition early to avoid delays. A lack of transparency in association governance during developer control significantly contributes to these delays.

While a developer-appointed board of directors can take actions without convening a board meeting if there is unanimous consent among the directors, developers should avoid relying solely on unanimous consents to conduct association business. Regular board and membership meetings are essential as they help homeowners understand the association's role, address issues related to the maintenance of common areas, and know when the developer plans to complete the development and fully transition out of the association.

Failing to hold regular, open board and membership meetings can lead to indifference or resentment among homeowners. Indifference can result in difficulties finding individuals to serve on the board once the developer needs to transition. On the other hand, resentment may cause homeowners to seek damages from the developer after taking control of the board. Neither is ideal for a developer keen to start their next project.

Pro-tip: Adopt an electronic meetings policy early to bolster homeowner attendance at regular meetings.

Strong projects are created through careful planning. By addressing title issues early, hiring professional managers, and planning for association transitions, developers can avoid costly mistakes, protect their reputations, and ensure their communities thrive long after the ribbon-cutting ceremony. Please contact us if you want to discuss how our team can support your next project.

If you have any questions, please contact one of our Commercial Real Estate Attorneys.

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