The Business of Building – Part 1
Welcome to the first in my series of blog posts on the Business of Building. Let’s start with a quiz.
In a normal market, what is the average Net Profit for a Builder? Is it
- 21% to 30%
- 17.3% to 20.9%
- 3.7% to 8.7%
- -5% to 0%
It has been my experience as a home builder that most home buyers have a real misconception regarding what percentage of the price of a new home is the Builder’s profit. The correct answer is C, 3.7% to 8.7%. The range reflects the differences between Builders who built exclusively on their customer’s land, Builders who built on land they developed or purchased, and Builders who built on both.
|Type of Builder||Gross Profit Margin||Net Profit|
|All Builders||17.3% to 19.0%||3.7% to 5.4%|
|Small-Volume Builders (1)||16.8% to 19.5%||3.2% to 5.5%|
|Production Builders (2)||18.5% to 20.9%||5.4% to 8.7%|
|Notes:(1) Builders who build 25 or fewer single-family homes per year|
|(2) Builders who build 26 or more single-family homes per year|
|Source: NAHB Cost of Doing Business Study|
The difference between the Builder’s Gross Profit Margin and Net Profit is the Builder’s expenses which include his or her General and Administrative Expenses, Financing Expenses, and Sales and Marketing Expenses. General and Administrative Expenses range from 8.3% to 12.9% and include employee salaries; payroll taxes, insurance, and other benefits; office expenses; vehicle expenses; taxes; general liability insurance; accounting and legal service fees and expenses, and depreciation. Financing expenses range from 0.3% to 0.9% and include interest lines of credit and construction loans; and closing costs. Sales and Marketing expenses range from 0.9% to 3.8% and include commissions, website hosting and maintenance, and other advertising and promotion expenses.
The Net Profit is what enables the Builder to continue to operate when business is slow and revenues are down. It’s what enables them to perform warranty and maintenance services on their finished homes.
According to BuildIdaho.com, the average sales price for new homes is approximately $190,000 in Ada County and $145,000 in Canyon County. For a small volume builder in a normal market, the average net profit on that new home in Ada County would be somewhere between $6,080 and $10,450. Considering that new home takes approximately 90 to 150 days to build, that equates to $1,216 to 3,483 a month.
Are you waiting for the price of that new home you’d like to build to drop further? I wouldn’t.
Chuck Miller GMB CGP CGB MIRM CMP MCSP CSP
President / Builder – Chuck Miller Construction Inc.
Posted in: builder profit, building, home building, real estateLeave a Comment (3) ↓
That should clear up a good deal of misconception. Your next blog ought to touch on the economics and why interest rates will have to rise and probably soon.
Tell them what a 1% increase in the mortgage rate will do the ultimate cost of the cost and the monthly mortgage payment.
I have been working on that very topic.
All new construction is built to Energy Star standards which include energy-efficient building techniques and features such as more effective insulation, high-performance windows, tight construction, more efficient heating and cooling equipment, and Energy Star rated lighting fixtures and appliances