How much does a home builder need to make on lot purchases?

by Ray
(Calgary, Alberta, Canada)

When working the numbers backwards, selling a serviced development to a home builder, what % value does a builder need to have compared to market value? For example, current lot values are $500,000/lot. For a builder to buy the lots (say 10), he needs to buy them at a 25% discount - $375,000 for him to be profitable?

Hi Ray,

The best way to answer your question is a point that some new developers have trouble understanding.

You mention 25% as a possible discount in your question. In most western banking circles an application for development finance must show a "minimum" 25% profit on cost for the proposal to be granted finance and that is for a project that built above ground. Land subdividers must achieve a 30% level.

So if 'your' feasibility study - all costs - including finance cost - shows a 30% profit at your land sales price of say $500K/lot then you have a financially viable development. Note that I did not say that you only make 30%. I said that this was the MINIMUM your feasibility study must show to get the finance - Got That?

So for the builder you are selling to, to also have a financially viable development he must be able to achieve a 25% profit on cost on the basis of his total costs.

So you must sell the land to the builder at a price that gives a minimum 25% profit result. Please read this a few times, as a lot of guys don't get it.

Hope this helps,

Colm
www.realestatedevelopmentcoach.com