How Much Profit Does a Home Builder In Seattle Make?

How Much Profit Does a Home Builder In Seattle Make?

The typical new home in the Seattle area takes upwards of 3 years or more to go from parcel to finished lot to finished house and requires, by some counts, 400 or more people to be completed.

To understand how a builder, who is at the heart of the process, makes money, it helps to know that that builder is responsible to direct all aspects of the process and manage all the various components, contributors, regulators, suppliers, consultants, staff, sub-contractors and, ultimately, the buyer. The builder is paid last and only after everyone else in the chain is paid-satisfied. The escrow doesn’t close, and the net check delivered to the builder, until all outside parties are given their share.


Take a representative sample new home in the Seattle area;

Sales priced at $750,000 / 3,200 Square Feet / Medium-High Finish Specifications.

Overall costs to build from inception (applicable sales taxes and interest included) –

  • $ 229,930 per Lot – Acquisition & Development (20+ contributors / consultants – including Land, Infrastructure, Fees, Consultants, Taxes…)
  • $ 59,655 per Finished Lot – Pre-construction & Indirect Costs (10+ consultants – includes Architecture, Design, Permits, Fees, Commissions…)
  • $362,915 Direct Construction Costs (60+ vendors, suppliers and sub-contractors):

$36,290 Foundation Phase (8 vendors – Grading, Foundation, Utilities…)

$ 108,875 Exterior Shell (14 vendors – Framing, Windows, Doors, Roof, Siding…)

$ 137,900 Systems & Carpentry (20 vendors – Plumbing, Heating, Electrical, Drywall…)

$ 36,300 Surfaces & Fixtures (10 vendors – Counters, Fixtures, Appliances…)

$ 43,550 Completion Phase (8 vendors – Landscape, Fencing, Cleaning…)

  • $ 39,675 Overheads & Administration

What remains is the builder profit, 7.7 percent of the total = $ 57,825.

This analysis is far from perfect and has assumptions that can vary widely between builders but will provide a basic understanding of the cost / profit dynamic in the sub-urban Seattle area.


Nationally, and over a period of the last 10 years, home builders have made between 7 and 12% on average, with the median return being something close to 9%. In Seattle, with available land constrained and at a premium, and the market not yet back to equilibrium, the return is slightly dampened but improving.

Another look at the financials of house construction can be seen at the National Association of Home Builders (NAHB) website by Housing Economics.com – Cost of Constructing a Home. This is a national average breakdown resulting from their most recent survey, but will offer another angle on the subject of How Much Profit Does a Home Builder Make.  

A visit to Newhomelink.com shows the top 20 builders in the Seattle area are currently building over 100 new neighborhoods. The median price of the homes in this group is $477,570 compared to the national average of $399,530. Local builders will have varying profit margins depending on size, scale and home type, but will generally fall within the margins discussed herein. In the local example above, builder profits are a lower percentage than the national average (7.7% v 9.3%) but a higher whole dollar amount per home ($57,825 v $37,255).

Have additional Questions or Comments? Please feel free to contact Steven Jewett directly at Newhomelink

 

 

Home Ownership Better than Renting? Yes and No

Home Ownership Better than Renting? Yes and No

The on-going debate about the relative merits of buying a home as opposed to renting will not be settled by short-term comparisons but there are some additional considerations to add to the mix:

Speaking in favor of home ownership;

  • Equity from Appreciation and Amortization – Owner’s equity can increase by both market appreciation and amortization (reduction) of loan amount.
  • Tax Incentives – Three primary types of favorable tax treatment accrue to homeowners: Mortgage Interest Deduction, Property Tax Deduction, and Capital Gain Exclusion on Sale.
  • Borrowing Power – As an asset, real estate can be used to borrow against, or as collateral for, this and other loans.
  • Permanence / Roots – Owners have historically been more rooted to their communities than renters who are more transient.
  • Predictability – Market prices for both purchase and renting are subject to similar supply-and-demand forces that can raise or lower values unexpectedly, but ownership offers more foreseeable costs due to the fixed nature of most loans.
  • Status / Community / Pride –There is no mistaking the pride and elevated status that is conferred on those that make the commitment to buy (literally and figuratively) into the community.
  • Customization – If you ever wanted to build a miniature roller coaster, treehouse, or baseball diamond in your back yard, you can appreciate the right to customize your home and property as you see fit.
  • Choice / Privacy – The freedom to walk naked in your garden on a Sunday morning while sipping herbal tea.
  • Location – The location issue cuts both ways. Most rental properties are located near areas zoned for commercial and higher density activities and tend to be high energy (read that noisy). Most for-sale, single-family homes are in suburban, less kinetic locations. Visit Newhomelink.com where there are over 100 new construction neighborhoods in the Puget Sound market from which to choose, many near Starbucks.

And for the renter’s rebuttal;

  • Possible Negative Appreciation – Those unfortunate buyers, who saw their homes in the Seattle area and across the country fall dramatically in 2008, know the perils of a cyclical market.
  • Maintenance – Typically 3-4% of home value annually, home maintenance can be both a bother and an unwanted expense.
  • Opportunity Cost – Measured simply by the base yield of the broad stock market over the last 30 years, securities have beaten out the average home appreciation nationally by a factor of 3-to-1.
  • Upfront Cash Requirement – Possibly the single-most difficult hurdle for prospective homeowners is the accumulation of the down payment and the cash to facilitate the purchase of a home, a problem renters do not have.
  • Limited Flexibility / Mobility – The flip side to the advantages of permanence and roots in the community cited above, home ownership limits one’s mobility and wanderlust.
  • Complacency / Lifestyle – An often overlooked aspect of home ownership is the tendency to grow too comfortable in your surroundings and fail to seek new and better designs and lifestyle improvements.
  • Responsibility / Fixed target – Homeowners have to appreciate the overall mantle of responsibility that comes from owning a fixed, illiquid asset like real estate.

Many of the metrics used to compare and contrast the benefits of renting versus buying in the Seattle area point to a Seller’s / Renter’s Market currently. Home ownership is more about the long view and less about simply economics, though. Just as it can be said that “All Real Estate is Local”, it is equally true that “All Real Estate is Personal”.  Homes are ever an emotional purchase and factoring the dozens of elements outlined above, will continue to be more subjective and less objective.

(Adapted from the original article by Steven Jewett found at the WordPress Newhomelink blog)