Understanding New Construction/Spec Costs

1 Reply

Hi, 

I'm trying to learn as much about the development side of real estate as I can and am ideally looking to start with flipping lots. I'd really like to understand the costs of new construction/spec as much as possible though. Right now I'm trying to examine markets/neighborhoods and have been looking through new construction/spec homes built in 2020 and sold and trying to analyse cost etc. Here is one example I've found:

  • Existing lot/home purchased: $130,000 Jul 19, 2019
  • Sold: $665,000 Aug 6, 2020 - 3 Beds, 2.5 Baths, 2,293 Sq Ft (~$290 per Sq Ft)

Existing purchase price represents purchase price that's ~19.5% of sale price. From reading here and elsewhere this figure (depending on market, lot condition, gradient, sale price etc.) should be ~15-25% so this example gets a tick. 

So taking off the cost of the land total construction cost (including profit) would be ~$233 per Sq Ft. I decided to find the permits to get a better understanding of the cost involved in construction. The permit had a construction costs of $230,000.

Taking original purchase price and this construction costs on the permit brings us to $360,000 ($157 per Sq Ft). Now they clearly didn't make $305,000 in profit. I'm trying to understand the additional cost involved, here's what I've got so far:

  • Financing
  • Holding Costs
  • Marketing/Sales/Commission

Am I right in understand that permits (thus the $230,000 shown) would only cover mechanical, plumbing, structural and electrical work? (I'm assuming this is different county to county? Does anyone have a list of work that would come under construction cost in the permit?) Thus these costs would not be accounted for:

  • Landscaping
  • Painting
  • Flooring
  • Appliances
  • Cabinets and countertops
  • Lighting
  • Fixtures

Or am I missing some items in either list? I've been trying to follow this lists from NAHB: Costs of Constructing a Home article. 

Is there anyway to reverse engineer from a sold listing so you can work out the costs of construction (not including financing or selling/marketing the property) so you could essentially roughly know how much it'd costs to build a similar grade house per square foot? The article linked does have % breakdowns of costs by category in relation to sale price. Are there any rough estimate rules like construction costs (labor, materials, permits, site prep etc. basically everything without financing/marketing/selling) is usually equal to x percentage of sale price?

Apologies if this is a little long winded and may sound basic but I have a huge fascination for development and trying to learn as much as I can on the subject. Right now I've built a rough tool that maps out new construction and demolition permits for single family homes and I can filter by price, date, builder etc. in order to try and understand markets/neighborhoods further and see where certain builders are building so I could potentially find lots/property to flip.  

@Rami Holzman

Why don’t you take the sold listing and show it to a builder in your area of interest. Ask them to give you a ballpark on what something like that would cost to build today.  

That will get you a lot closer than trying to analyze a pre-pandemic build that sold right after the market took off in most areas.  You don’t know if that was a builder doing things at cost or if this was someone else paying market rates for construction.