Profit margins on new construction homes

[Brennen McConnell]

I have foreign investor capital lined up to buy vacant lots and build new roughly 1,750 sqft homes in the Greater Seattle Area, including Tacoma and Everett, and am looking for feedback as to whether or not my assumptions are correct. The investors will be funding the entire project with cash, so I don't have any financing costs to assume. I have assumed that the cost of the lot will be approximately $100,000 if not in the city proper, and that cost to build will be $170 psf, so about $300,000 assuming 1,750 sqft. I am assuming the $170 psf includes all permitting and general contractor fees. At $400,000 total cost, I assume that I can sell the house for $450,000, and that less 6% in broker fees, the net profit would be $27,000, or 6.75% of $400,000. To me, that seems a bit low. I have read elsewhere that one can expect to earn a 10-15% profit on new home construction. 

I am wondering if anyone has feedback on my assumptions? I have never built a house before, though I do have experience with doing rehabs. But I am pretty much a complete newbie when it comes to new construction. However, I have the capital lined up and need to find a way to make it work. 

[Sue Hough]

@Brennen McConnell there are many expenses you are forgetting which need to be calculated with accuracy prior to the start of your project, or I fear you have the potential to loose money.

1. Infrastructure - Land clearing, water lines, sewer lines, utility hook ups, roads, sidewalks and so forth.

2.  Is there the possibility for contribution from the local city or county for any of these fees?

3.  Will there be “impact” fees for each home.  This is the fee added to the permits to adjust for the fact there has never been a tax-producing residence on the site.

4.  You need a contractor(s) to bid for complete (Including all finishes) and accurate pricing with a clause for inflation guaranteeing the pricing for up to 12 months. Guessing how much a construction project is by square footage is a sure fire way to be 100% wrong every time.

5.  Additional soft costs include; taxes, insurance, utility usage, attorney fees and so on.

To be successful in any business venture you need to have accurate numbers. At this point, you do not.  Please do not go forward until you have the numbers and are working with a seasoned developer, as there are too many line items to risk at this point.

Good luck!