Negotiating base price of new home

[rubynicholson77056]

Originally Posted by EM1956

Well, I know that Meritage raised the base prices on their homes, at least in Katy by 5,000 in April. Not sure what incentives they are offering now. In January it was 12,000 in upgrades plus some of the closing costs.

I second that. The home we contracted to build in March increased by $13k two months later.

[Supermac34]

Originally Posted by desertsun41

Dont underestimate what the builders are making. Your 10% suggestion for a builders profit margin is pretty dead on with large tracts where there is only 3 to 5 models. With just these models that the builder builds over and over and over again they have developed a take off list that is pretty much to the dime. A take off list is a list of every single piece of material and fixed negotiated labor costs to build that house. The very fact that the builder knows his cost up front allows them to set the profit margin at just 10%.

Custom builders might have a markup of 25% over cost. Do you think a spot builder that might build perhaps 2 to 6 homes a year can survive on a 10% profit margin? If you were a builder, would you build a $200,000 home that takes 6 months or more for a mesly $20,000 profit? No one can stay in business very long like that. A tract builder who builds 1000 homes can thrive on 10% of 1000 homes.

Condo and townhomebuilders make much much more. One tract of condos that I contracted with to supply my product for, the builder told me those 5 unit buildings they are building, once they sell the first 3, the last 2 are pure profit. Those end units that people snap up first cost really nothing extra to the builder yet all builders charge a $10,000 and up premium for that end unit.

There are many small time builders that would love $20,000 profit on a $200,000 home. Of course, no custom builders build in that range anymore because they can't compete with the tract builders at that price. They are going to be $400s minimum now. I know these numbers from personal experience with people close to me in the industry. It is very true, more often that not, that builders make less than the realtor fees on a new home. These people are not making the killing that you suggest, especially in the suburbs of Houston. Of the dozens of home builders that I personally know, I bet not one has made 25% on a home, ever. Usually they are in the 5-10% range.

There is a reason that 90% of new home builders go broke. They think they will easily make a killing on their homes, then they figure out that they work really hard for a fair, but relatively small profit. They don't know how to price their homes to sell, they go over budget, then they go out of business. Its a very tough way to make a living.

And the major reason for this: the land. The lot price. Smaller custom builders make very little if anything on the land portion of the home. They are basically having to get all of their margin IN the house. The larger tract builders have big enough tracts of land that they build profit into the LAND and the HOUSE, so their combined margins show up about 12-15% while a custom builder, making little if anything on the lot (which he basically paid full price for) is going to have to take all his margin on the house itself.

This doesn't even take into account that during a bad time in the housing economy, builders dump houses ALL THE TIME for no money, or even take losses, just to get rid of the loans so they can try to move on to the next one.

I'm always amazed at people's crazy opinions of how much goes into a builder's pocket on a house. If everybody could make that much money on it, everybody would do it!

And none of this even takes into account that the builder has to warranty that house, and will most probably spend money in the coming years on warranty work, further cutting into the profits.