Gross margin = sales – (building cost + land + development)
So you’re all correct. Gross margin ranges about 23% to 30% without writedowns. So. Cal has been a high margin region for builders, so during bubble time, gross margin should approach 30%. The $90 to $110 building cost should be within the range, too. But Land cost and development costs (to get various permit, road, sewage, telecom, etc) are costs not considered in previous posts. That’s how these numbers reconcile. That is, $300 (sales price/sq) = $100 (building cost) + $110 (land and development cost) + $90 (builder gross profit)
What builders make (operating profit, before tax) is Gross profit – administrative and selling costs (including salary/commission for that agent!). The average has been 8% to 10% of sales price. So the builder will make $90 (gross profit) – $30 (10% of selling costs) = $60/sq.
So a builder should be willing to go as low as 20% lower if that is that takes to get rid of inventory and get back their investment in cash. But a desparate builder that’s selling the last few houses in a development should be willing to take an even lower price — because marginal costs is lower than the above calculation.
Realtors — what’re the average price/sq in San Diego in different neighborhoods?
