After all is said and done, how much does your builder walk away with?
Do you wonder how a builder decides what to charge for a new home? You know that you pay for the lumber, carpet, fixtures and all the details, but how is the final price determined?
Buying a home requires a lot of money. The cost is based on many different factors, including the construction, land and the marketing and administrative costs for the builder. And of course, the net profit.
Does it sound any easier to understand?
Most builders will charge in a similar way. The construction of the house will account for approximately 50% of the base price of the home.
There are several costs within the construction factor. There are direct costs, which are the sticks and bricks. These are all of the materials that go into the home, from the lumber to concrete and windows to carpet.
The work is usually mostly provided by subcontractors hired by the builder.
Then there are construction labor costs. These are the costs associated with work performed by the builder’s employees. These go along with the indirect costs, which are usually performed by the builder’s employees. They include the correction work that is done to fix any mistakes by subcontractors.
You will also be charged the construction interest on the home. To finance the purchase of the lot and the cost of construction before you pay the builder, the builder takes out a bank loan. The cost of the loan, including all interest and fees, will be figured into the base price you pay.
The actual cost of the lot can be between 25% and 40% of the base price. With the cost of land constantly going up, especially near metro areas, the lot portion has increased over the years. Added to your land costs are any off-site improvements, such as water and sewer lines, street developments, curbing and paving and driveways and sidewalks.
Many builders offer a discount on the base price, often by paying for points at settlement, to encourage first-time buyers. A discounted home will often have construction costs that equal 50%, lot costs of 30%, a discount of 3% and a 17% gross profit.
Out of the gross profit, the builder deducts administrative costs, marketing costs and taxes.
If you choose options, you could add 10% to 30% to the base price.
Surprisingly, builders walk away with less profit than you would expect. Net profits on the sale of a home often ranges from 2% to 6%. In general, the larger the home, the higher the net.
You can easily find out the net profits for builders that are publicly traded companies. You simply have to read their annual reports.
When you are contemplating the building of a home, sometimes you should shop around a bit. Compare the costs for similar homes offered by different builders. Ask the builder how much of the cost is construction. They may or may not tell you. But it never hurts to ask. You can use this figure to estimate the rest of the costs.