what formula is used on a new build

[Acencion M.]

Hello, I have a question. I am going to put an offer on a house that's old and not up to date. There are builders that are tearing down the houses and building new homes going for  $700k and up.  Some houses have been remodeled using same structure and selling $280 -300k. My question is how do i come up with the amount i should offer?  Would it be the same formula as if I were to sell it to someone that would rehab?

[Robert Wilson]

it's going to depend on what margins the builders are operating on in your market.

Let's say your rehab model is to bid at Sale Price + Rehab is 70% of ARV. Your total budget on the front of of your deal maxes out at about $210k (70% of $300k)

Now on land a quick rule of thump is 20-30% of the final sale price could be in the land... However at the high end that model shifts dramtically because of the dollars available at a 15-25% margin for a builder who is dealing with far fewer variables than a Rehabber and  therefore has less risk.

A builder who pays $200k for the property and invests $100/SF to build a 3500 SF home that sells for $700k is going to make a nice spread even if his costs of sale are 10% (commission, closing, and marketing overhead)

Basically the builders margin will be based on the cash return from the land and build investment... In this example the land costs $200k, the build $350k... Total in $550k... Sale price after Costs of Sale $630k...

Profit 80k on an initial investment of 550k. Which is about a 14.5% margin. 

That might be high or low in your market... And all the other numbers are speculative... However that's how you do the math with numbers that are simple to use and should help you evaluate the project from a land perspective.

I might even have a builder for you in Houston if you need a referral to sell it to.