Ever wonder how builders determine what they're going to charge you for one of their houses?
What goes into pricing a house is hardly a mystery, but if you are going to plunk down a few hundred thousand dollars for a new place, you should know how the price is figured.
Your cost is based on the costs of construction, land and improvements, and includes the builder's marketing and administrative costs and net profit.
Simple as that.
If a builder is a publicly traded company such as Toll Brothers Inc. or Orleans Homebuilders Inc., buyers who know their way around annual reports are often surprised to learn that the net profit on the sale of each house is only 2 percent to 6 percent.
"The higher net is typically for larger houses," said Gary G. Schaal, Orleans's vice president of sales and marketing, who has been building and selling homes in the Philadelphia area since 1973. "The reason is that larger houses are more expensive, and administrative and sales and marketing costs per house are lower."
The 2 percent net profit would be on sales of town houses or condominiums.
Each builder has a unique way of doing business, but some things are common to all, Schaal said.
Construction, which accounts for about 50 percent of the base price of a house, has several different cost components:
* Direct costs. Also called house costs, these expenses are defined as "stick and bricks," meaning all of the materials that go into a house--framing lumber, concrete for foundations, windows, roofing, tile, flooring, drywall and carpeting. This work is performed primarily by subcontractors hired by the builder.
* Indirect costs. According to Schaal, this is usually work performed by the builder's employees and can include the use of special tools needed for a unique job, supplies or the cost of preparing a house for settlement by correcting work that was not done properly by subcontractors, such as recaulking a bathtub or sanding and restaining a length of baseboard.
* Construction labor. This is associated with work done by the builder's employees.
* Construction interest. To finance the purchase of your lot and the cost of construction before you pay for the house, the builder has to take out a bank loan. The cost of the loan, including interest and fees, is figured into the base price.
The cost of buying the lot and preparing it for construction accounts for 25 percent to 40 percent of the base price, Schaal said.
"It is getting more expensive, as land becomes less plentiful and the owners of choice sites demand more from builders for their property," he said. "Costs of preparing the raw land also is growing more expensive."
Many building sites fail to make the cut during the long approval process demanded by many municipalities and state and local governments. Some of the land the builder had planned for housing may instead have to go to satisfy open-space requirements or fall into a protected category.
Often, a builder has to raise the prices of the houses that are constructed to compensate for the loss of land he originally thought he could build on. Municipal and state permit fees can often add $2,000 to the price of each lot, although most builders factor that in beforehand.
But "buying the right piece of land is key to the success of any job," Schaal said, "and that's what all builders are trying to accomplish."
Land costs include off-site improvements, such as building water and sewer lines to connect with existing service that could be up to a mile away, or even an off-site pumping station.
On-site improvements include sewer and water hookups, street development, curbing and paving, and driveways and sidewalks.
To encourage first-time buyers, especially with condos and town houses, a builder often will give a discount of up to 3 percent on the base price, paying for points on the mortgage at settlement, Schaal said.
"It ensures that [buyers] can get into the house," he said. "A lot of them have high-paying jobs but not much in savings, so the discount helps them make it successfully through settlement."
If a basic house costs a first-time buyer $100,000, with construction costs typically accounting for $50,000, the lot costing $30,000 and the discount totaling 3 percent or $3,000, that would leave a gross profit of $17,000.
Out of that would come administrative costs, sales and marketing costs, and taxes.
"You have to build a lot of houses to even get as much as 2 percent" profit, Schaal said.
Over and above the base price is the cost of options, Schaal said.
"Option costs can run all over the place," he said. "If you are talking about a $100,000 town house, it could mean $3,000 to $10,000, or 10 percent, above the base price. If it is a high-end house, then it could be 10 percent to 30 percent above the base, or $150,000 or more."