Investor · Santa Clara, CA · Member since 2015 · 28 posts · 6 votes
When building spec homes, how do you determine the size of homes to build? I'm running this exercise in my head and so far, I can imagine a pretty linear payoff within a certain size range. For example, if your total construction costs (land, soft+hard costs, etc) is $150/sqft and you can sell your house for $200/sqft, then you make $50/sqft regardless of whether you build 1500sqft or 2000sqft.
But what I have to assume is that at some point, the payoff is no longer linear and I'll begin to hit diminishing returns. So then the question is, what is the math that goes into finding the optimal building size? Would it change if you're development is surrounded by undeveloped land all around vs. in otherwise established neighborhoods?
We first find the neighborhood we want to build in - does it have the types of lots we like to build on? How many spec homes are being sold in that subdivision? What is the average days on market? Per square foot close price? etc.
Once we know that, we build a home that suits that neighborhood and the types of people who want to live there.
I think he is asking for the lot area less easements. Soft costs varies a lot in CA. That could curve the profit linear, and CA land holders sell land at 30-40% of ARV, pretty crazy.
Thanks for the reply guys. I'm probably overthinking the issue then. The nature of the neighborhood I'm thinking about building in probably shouldn't exceed 1500 sqft. Also, Manolo is correct, the soft costs here in CA varies wildly. I'm backing out of the deal I'm asking this question for because the city wants $50k per house on a neighborhood where I doubt anything will sell north of $350k.
@David Jiang What do you mean 'The city want $50k...". Are you referring to fees or something? And I guess this is not in the Bay Area if you are talking about $350/sf ?? Just wondering..