Development Costs Vs. Final Sales Price
Hey Group,
Just wondering. What are the usual margins for a development deal?
Meaning:
If a new home has a market value of $500,000. What percentage of this should make up the total development costs? (i.e. Architects, construction, builders, etc...?)
Is it a rule of thumb to sell it for double of what it cost to build? do such rules exist?
-Angel
Different people use different rules of thumb, and rules of thumb are always subject to modification.
The rule of thumb that builders, at least those in my area, use is value of the end product (house on lot) X 25% minus lot improvement costs (streets, curbs, sidewalk, utilities, etc.) = value of the raw lot. This rule of thumb basically takes into account all expenses, including but not limited to house construction. So, for instance, if the new home on its lot would sell for $500K, then the raw lot value would be $125K less lot improvement costs. This rule of thumb is used primarily as a quick screening tool.
Builders then analyze the deal and determine margins by running a pro forma that projects what a house of X SF would sell for and lists every expense, including engineering, legal, marketing, debt service, sticks & bricks cost, closing costs in and out, site improvement costs, etc.
I don't know what you expect the building costs to be of the house and what other costs may be involved in your scenario, such as site prep, utilities, permits, etc.
I will share my rule of thumb when I look at property for multifamily. I want to make four times the cost of the land in profit at the end of the deal. I pay $400,000 for the land, I am making $1,600,000.
Another rule of thumb is that land development costs about the same as the land.
These Are VERY VERY arbitrary numbers and simply acid tests when I look at a deal. And note that I build mutifamily - condos, not SF.
Gregg
[addsig]
I gotta tell you I don't think many small SFH developers are making 50% margins these days, most I know would be delighted with 25%. At least one guy I deal with regularly is trying to make it on 15%. This is part of why I don't do SFH
I like to keep land cost at 20% of total project cost. With OSB and plywood tripling in price in the past year materials are becoming one of the major cost factors.
Hard and soft costs should run between 80%-85% of the sales price -in this range. I'm assuming that this is a semi-custom built SFR and includes the higher markups for the add-ons.
Hey Group,
Excellent responses. It's actually for a two family plus, 3 bedroom basement, in college town. Building a potential investment property.
-angel