Curious to know if there are any homebuilders here on the forum.

I have a question for you (or anyone that would have some intel in this arena).

I know someone who is currently in the early stages of building a new home. They've bought the 1/2 acre parcel for $50k (construction loan) and are currently working on the layout / design of the home with an architect.

Question:

They have a family member who is in the building / GC world and has offered to build this person the home at cost -- zero profit. They'll still be bringing in all of the normal construction crews -- foundation, framing, finishing, etc. etc., it's just that the builder won't be building any profit into what those teams do. The builder is pretty small -- only doing a handful of homes per year .. or doing flips.

The bank that the construction loan was obtained through will loan 80% of the appraised value of the home (pretty standard).

The buyer's idea here is that they can build a home (and the $50k land included) for roughly $640,000 (actual cost) which will then appraise for $800,000 -- so they'll instantly have 20% equity in the property ... meaning the bank will then offer the loan without issue.

So they'll effectively have zero down payment and have the nice equity gain right off the bat. The person I know doesn't have the down payment money so this is a back-door way to get into the house (and homeownership, in general).

The homes in this neighborhood range from $675k - $1.5M so the $800k appraisal isn't unrealistic.

These numbers don't add up to me, though -- do they to you? This would mean that the builder could build just a few homes per years and make close to $500k a year in profit .. generally speaking.

I would think on an $800k home that there may be $60-$70k in profit .. not $150k+.

I know a lot of it depends on what is costs to build, per square foot .. but I don't know those numbers. It's a ~3,700 square foot home.


What is the ballpark net profit that builders shoot for?


If this all works out .. I may look into doing something like this too ... as a side-profit. So I'm curious to learn more. I may be missing something really obvious.

Not a home builder but a good buddy is.
Granted there are a whole bunch of variables but he averages around 20% profit per house when the market is good.
Market is bad and interest rates are high it is a different story.

I don’t know any details about the house other that it’s around 3,000 sf and on a lake near Knoxville, TN. My best friend built it for himself but ended up selling it in a cash deal to a couple from Los Angeles. Pocketed $244,000. Now he has 2 more going.

So, in this area, right now, his numbers are certainly possible. How long this will last is anyone’s guess.

quote:

I would think on an $800k home that there may be $60-$70k in profit .. not $150k+.

Lots of variables but the profit on a 800K home today is double what you think. I would even say 150k is low depending on options and location.

The housing market is insane right now. My best friend manages a sales team for a new home builder. They can't build them fast enough now. Profits are high.

Early returns here are saying I may be in the wrong business .

quote:

Originally posted by Black92LX:
Not a home builder but a good buddy is.
Granted there are a whole bunch of variables but he averages around 20% profit per house when the market is good.
Market is bad and interest rates are high it is a different story.

I’m not a builder but as of May 30 of next year I will have officially been in an industry that’s very closely related to new residential construction for 30 years. We do see the permanent title commitments for every house our clients close on (sell) and yeah, a 20% seems about right. Possibly even slightly low when one considers how much construction costs have gone up since da Rona kicked off back in March.

I know what my company has billed for in December alone to this point and it’s pretty healthy, especially when one considers the amount earned Vs employees. We have all definitely worked our butts off and we’re all looking forward to the break we’re hoping to get after the end of the year, but I digress.

If your friend can do this at cost with 0 down and have roughly 20% equity then yes, that’s about market value from what I’ve seen.

Risky game when one does not have enough money to cover his bet.

The housing market can turn in the blink of an eye, and if that happens, your acquaintance will be in the same "flood" as all those new houses that cannot be built fast enough, turning into chests of gold on a sinking ship.

And at this point in the socio-political-economic field, I would think long and hard about going that route.

But it is easy (for me) to "spend" another person's time and money, when you have nothing in the game.

quote:

And at this point in the socio-political-economic field, I would think long and hard about going that route.

What Professor Monkey said!!!!

considering the time, energy and risk involved, 20% would be a minimum for me

I’m more concerned about them building a $1M home with no down payment money...

Sigmonkey is right. The market could turn, prices of materials are extremely volatile now and the speculator has no funds (and experience) to cover the bet.
What could go wrong?

I would check with the banker here. In most cases, bankers will lead XX% of value or cost, whichever is less. There’s still value in immediate equity in the house, but I would be surprised if the banker would count that gain as a down payment.

Hope I’m wrong.

pretty good deal for the friend / gc he will get paid his going rate of 75 per hour ? or whatever they agree upon for how ever long it takes.

No pressure on him they change their minds it's more time for him. who needs a profit margin when you have a gig like that?

I have been in the industry as a sub for 33 years.

quote:

Originally posted by ridja75:
I’m more concerned about them building a $1M home with no down payment money...

I agree. I also don’t believe just because someone is a friend or family they will work for no profit. Usually that really means no DESIRED profit but still a nice healthy profit. It’s like when someone tells you they got a deal on a car because they have a friend there. Watching videos on YouTube of car salesman they will tell you their biggest profits are from friends and family because their guard is down.

On a house that experience wouldn’t trust anyone other than myself to make sure I stayed away from having to need PMI insurance which is what this is really about.

Keep in mind also that when you build a house the average person spends 8-12% more because no one sticks to the plan from start to finish and when you are building there will be plenty of things you specifically want that don’t necessarily add value to someone else.

We have been in our dream house for 5 years now and it would have been cheaper to buy an already built house but we had a bunch of very specific wants that a prebuilt house would not have had. The next guy coming in may not care so much about specific details so those values won’t necessarily carry forward but we realized that and don’t care.

I build houses and charge 15-25% depending on how much involvement I’ll have in the project.

This message has been edited. Last edited by: cheeze,

I worked for custom builder for 4 years. We once had a customer come to the signing table and requested we cut the price by 5%, since there was so much profit in new homes. My Boss told him if he wanted to sign a contract for cost plus 15%, he would sign that contract.

They client ended up signing our contract, on which I believe we made 14% after all was said and done.

This client really thought my Boss made 25-25% on every home (back in the late 90's).

I may not be tracking on the sequence of things, but it sounds like the potential for a fraudulent loan application? I doubt the bank would find that entertaining.

As others have said what you're missing is the risk element. In 2009 we were house hunting in Las Vegas. Literally looked at roughly 100 bank owned properties. One was an engineer who had bought the house on speculation that the Vegas market would continue to sky rocket. He had a second mortgage to account for the 20% down payment. We wanted to buy at the 2009 price which was 50% of what he had in loans. Couldn't even get a response from the second with him offering to pay them $3000 for a release to sell. (No standing and they would get zero any other way). This left him stuck and unable to sell in any way.
Reminds me of my Best Man's inlaws. They were getting something like a 10% return on some Bank of Iceland CD's. Until they didn't get their principal back. Yep, Risk is a real thing.

I assume the bank is doing an appraisal based on the plans and then a final once it’s built? If that’s the case the risk should be rather low.

quote:

Originally posted by Copefree:



The bank that the construction loan was obtained through will loan 80% of the appraised value of the home (pretty standard).

The buyer's idea here is that they can build a home (and the $50k land included) for roughly $640,000 (actual cost) which will then appraise for $800,000 -- so they'll instantly have 20% equity in the property ... meaning the bank will then offer the loan without issue.

Im not following the math.

Are you saying the bank will give the buyer $640k up front, before the house is built? I was under the impression construction loans funds are released in stages when so much of the project is completed. Otherwise the bank can get burnt when you build a $250k and pocket the difference.

I would think the bank would give them $640k minus 20%. Then after the house is built the appraisal could be done. I don't see how an appraiser could value something before it even exists. Around here a land and construction loan are usually separate loans. Land loans usually require a high down payment percentage. After the house is built you can refinance the two loans together since the property is complete. At this point you would gain the equity.