What is the average PROFIT on a spec home sale?

Question

Hi BP,

I'm a spec builder in Alaska. I've built 4 multi-families, 2 single families and am currently under construction on two more. All within two years. My question is if anyone knows the average PROFIT builders are making on your typical, cookie cutter, 3 bed, 2 bath, 1300 sq ft home?

Jay Hinrichs · Answer

we don't build that small in our market not profitable to do so.

but generally speaking 8 to 15% of gross sales price is what we try to NET NET NET>

anything above 15% is a huge homerun for us.

build cost are generally the same or close to the same for most of us.. its how you bought the dirt that will determine the profit.

Jeffrey Stasz · Answer

With no leverage I do between 20-25% COC. With leverage I am a little closer to 50-75% COC. I have a current project with comps coming in around 400% but that is an anomaly.

My minimum cash return has to be above 100K for me to touch a deal. I play in the same sandbox as @Jay Hinrichs and really admire the work he does. I am also working to be more like Jay where I can do 30+ deals a year. But, right now I am in the dog years of starting my business so I have to be super super careful about the development projects I take on and I am wearing a tool belt more then I'd like to admit.

Take this all with a GIANT grain of salt. I own and operate a construction company alongside an investment fund and that gives me a crazy competitive advantage. I also moved my business and family to Charleston SC to go all in on RE Development and Charleston is probably one of the best markets in the county.

Rylan Lacey · Answer

In the spec home development space I’m building entry level 1,350-1,500 sq ft homes for about $200k (including land, interest/closing costs, build costs etc.) in Phoenix, I sell them for about $325k each. After commissions and such i net about $95k-$105k per home. Profit margins are identical to the new construction multifamily development I’m doing now, just with smaller sales price and smaller build price

Jay Hinrichs · Answer

sell 500k spec home and make 50 to 75k is pretty standard and we do about 30 a year .. so its about a 2 million a year net income or taxable income for us.

Karen Margrave · Answer

@Jay Hinrichs I know you build in several different markets,  how many people do you have that are working for you to run that many projects? Do you act as developer and hire project managers, GC's, or ? That's a lot of projects in a year to keep track of with finding land, permitting, building, etc.

Jay Hinrichs · Answer

include all costs of the project …. land vertical debt and sales commish.. we are blessed that we can borrow from our local banks.

in some markets this is pretty tough frankly.. so I feel proud of that for sure.  And all those years grooming my local community banker relationship are really paying off for us the last 5 years.. I started building coming out of the GFC were my bank was selling us lots and financing them they had foreclosed and since my relationship spans almost 25 years with the same banker it was I think a reward for being a loyal client.. plus they never lost a dime with me in the bad times  LOL.. 9 out of 10 builders in our market had to reorg and gave the keys back to banks those folks are kind of relegated to HML.. our cost of capital is probably 1/2 of my competition so that helps with margins..

Khaled Helmi · Answer

Thanks @jayHinrichs - I was thinking this was more of a higher risk strategy that needed higher returns.  You guys are doing great by just churning them out and i'm sure that just like everything else in the industry, there are builders that aim for the big profits and less sales numbers (more unique high-end properties)

Khaled Helmi · Answer

15% seems low and I figure your profits are probably similar to others in the industry.  Is that a factor of this current market (i.e. did it used to be higher in the "good ole days"), or is that a historically normal number?

Wade Stahle · Answer

Hey Michele,

Average build price with land is 150-165

What is the average PROFIT on a spec home sale?

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