Re: Builder proftis / new construction - Posted by ray@lcorn
Posted by ray@lcorn on September 22, 2004 at 20:13:28:
Here is part of a post from about a month ago.
I was a SFH builder for about ten years a lifetime ago. It’s a hard way to not make a living. And building on scattered lots is the toughest of the tough because you don’t get the advantage of using assembly line type completion, meaning speed, moving the subs and excess materials from one house to the next. Ever heard the expression “Time is money”? That had to be invented by a contractor.
Take that example of the $200,000 house… let me show you how the numbers work on the builder’s side… say its a 2,000 sf two story, not a big house, hard cost of about $65-$75 psf in my area -six months avg. construction time unless componentized
$200,000 sales price
-$30,000 lot cost
-$12,000 sales commission
-$130,000 hard cost (low side)
-$8,000 5% soft cost on h/c + lot (interest, overhead, etc.)
= $20,000 profit
That’s if everything goes right(!) and, oh yeah, good weather. Tough gig.
Most folks that are successful in the building biz are either;
A) Very big (more than 50 houses a year); use component systems (modular, panelized); run by job foremen over captive subs; central office staff to process the paper (supplier payables, change orders, sub invoices, draw requests, closings, etc.); can make money on 10% margins as above because of volume, or;
B) Very small (2-6 per year), hands-on, custom jobs, mostly high end. Avoid the overhead by working from home and truck; using craftsmen type subs; trade credit instead of bank loans. They’ll get margins of 20%-25% because of high quality, low overhead.
The middle ground (12-25 per year) is known as Death Valley of the construction biz… quality suffers because of price pressure competing with the bigs; buyers want the quality of the smalls but can’t afford the materials or the craftsmen = unhappy buyers and lots of call-backs; speed is not bad but not great even if componetized because there isn’t enough work to keep subs captive; its more than one person can do but not enough for complete staff. The overhead kills you because it isn’t spread over enough units; margins are non-existent.
That’s personal experience talking… I’ve done all three.
The original post is at http://www.creonline.com/commercial-real-estate/wwwboard5/messages/13069.html
The thread it appears in also has some information about development costs.
I’ll add to this discussion that most builders miss hard cost estimates by underestimating the final finish material costs, especially when a buyer is in the picture before the house is complete. $65 psf in my area gets a little above average finish materials, not quite custom, but above tract house standards. That’s the expectation for the price range of the example, but your market may be different. Required finish quality (e.g. carpet allowance, light fixtures, trimwork, doors, cabinets, etc.) is often determined by competitive market factors. If the builder down the street is using upgraded finish materials and state-of-the-art appliances and you’re competing in the same price range then the buyer will either request an upgrade or offer less.
The soft costs, as Steve’s post mentions, are also usually underestimated. Your estimate includes no soft costs such as commissions, closing costs (at least 2, maybe 3 closings), interest carry costs or overhead (insurance, phone, truck, etc.). Excess time on market is another profit killer.
For lot cost, the rule of thumb is a 6 to 1 ratio, house sale price to lot cost, about 17% of sales price, for a FULLY DEVELOPED lot. Some will push it to 5 to 1 (20%) but go any further and there won’t be a profit on the house. You’re within the parameters (144,900/6 = 24,150) as long as you’re building the right product (size, features, quality, etc.) for the neighborhood.