Builders margin?

[kagster]

Does anyone who what is the builder’s margin on homes? I asked a few agents but they won’t divulge.

If they could afford to give incentives the margin’s gotta be pretty good.

[kagster]

oops…typo…

Does anyone know what is the builder’s margin on homes? I asked a few agents but they won’t divulge.

If they could afford to give incentives the margin’s gotta be pretty good.

[lindismith]

I’ve asked this question a couple of times too. So far, no one has been able to tell us.

[Anonymous]

I can’t confirm this, but I heard one number of margins in the 17% range in the heddy days of the last two years. That information was 2nd or 3rd hand and probably came from an unreliable source but it’s better than nothing.

[heavyd]

For publicly traded companies, financial results are a matter of the public record. TOL made gross margin of 35% as recently as Q42005; it has come off to just below 30% in the June quarter this year, but clearly they have plenty of room to throw in $5000-10000 worth of options on a $1m house and still make a great return (34% in 2005 — not too shabby). We have a long way to go before any of the large, publicly traded builders starts to feel pain.

[BobbyD]

I had read previously either on this site or another of the RE blogs that the builders cost is typically $83/sq foot. Perhaps, with higher end features, it is $115/sq ft.

If that is accurate, then assume that an average 3,000 sq foot new construction home sells for $1 million. At this sell price, there gross sell is at $333/sq ft.

So assuming the above, their margin is quite fat and much greater than 30 or 35%. Someone can validate that. That is what I remeber reading.

[heavyd]

Again, the figures I am citing are pulled directly from the builders’ 8-K statements, filed with the SEC. You can assume they understate margins, but given how closely the Street has picked apart these companies’ financials over the past few years, you need to offer more than a hunch.

Gross margin at Toll Brothers in the fiscal year ended October 2005 was precisely 32.2% and this represents the peak, clearly (gross margin back in 2001 was 26.5%).

At Lennar, fiscal 2005 (Nov year end) showed a gross margin of just 16.1%, up from 14.5% in FY2001.

Toll Brothers focuses more on high-end developments, which should explain much of the difference. In terms of actual cashflows, I am guessing Toll Brothers’ margin last year was around 25%; these guys are not stupid, and it appears they have been cashflow +ive at the operating level in every one of the last 20 years.

That still suggests we have a long way to go before the various financing and upgrade incentives make a real dent in their cash earnings. It’s worth keeping in mind (here I am stating the obvious) that the $10,000 in upgrades they offer as an incentive probably cost them at most $6,000-7,000 out of pocket.

Lastly, I wouldn’t use $1m for a 3,000 sq foot home (=$333/sq ft) as a national average. That is rather ordinary for here in SoCal but would be considered fairly pricey in a lot of parts of the country away from the 2 coasts.

I don’t know what kinds of conclusions you can draw from the above examples…on a home with $1m ‘retail’ value, which gives the builder a 25% cash margin, how much debt is the builder using to finance construction, net of prepayments from the lucky buyer?

Someone smarter than me should be able to figure out the cash cost of the builder holding onto that home for an extra month while waiting for a buyer…that will get you closer to the kind of incentive they will be willing to offer and still come out ahead (or with a minimal loss).

[BobbyD]

HeavyD, I do not disagree at all and concur with all of your conclusions above. I just wanted to share what I recall reading on one of the sites.

These guys have a lot of cushion and are my no means operating on thin margins and am sure that they anticipated and have prepared for this slow down.

In the new developments that my wife and I have looked at in Scripps Rch, the builders have not budged on prices and have provided little to nothing in terms of incentives. And they all have a dozen or so unsold homes sitting on their hands. But it appears that they are not hurting enough yet to lower prices or deal.

I know that there are other developments where the builders are being much more generous. Year end should prove interesting as they try to unload the unsold homes that are on their books.

[sdcellar]

Yeah, I agree with all of the above as well, but wonder what the margins are for the projects here in San Diego.

Difficult to tell from the national numbers, but for whatever reason I suspect the margins aren’t as high as you’d think (although they must be higher, mustn’t they?)

Getting local figures for national builders seems difficult. Maybe if we could get figures for more local builders (like Davidson and I don’t know who else)?

I don’t think Davidson is a public company though…

[Anonymous]

It seems like one of the first things builders do in a slowing market is to begin to offer introducing brokers a commission. A number of builders don’t feel the need to offer a commission in a fluid market. It is relatively easy to offer a 5% commission and then more incentives on top of that (to the broker) and not have it appear as much of a concession to the rest of the world.

A builder must also temper their pricing actions against their plans to roll out future phases while trying to offer a product that is well received in the marketplace.

Some builders also might assist the potential buyer by purchasing the homeowners existing house to facilitate the close. They presumably then have less visability in taking a discount on the sale of new construction.

Another incentive that can easily be later discontinued is on the financing – either in buying down the loan rate permanently or doing some type of temporary buydown.

I’m not sure what the other measures are that builders can take but I can well imagine that short of the project being closed out, the last thing the builder wants to do is cut their prices too much.

[heavyd]

Yeah, fact is in Scripps Ranch and Carmel Valley the big builders so far are offering very meager discounts, maybe a few thousand $$ in help towards closing costs and some minor upgrades. They don’t appear to be panicked, but then again the peak Summer selling season just ended.

Unfortunately, I don’t think Davidson is publicly traded. Or if it is, it’s one brand among several at a larger builder.

Taking a quick look at these companies’ SEC filings, it appears they do provide commentary on the strength / weakness of regional markets, but not to the point where they disclose margins on individual developments.

Say what you want about them, the guys that run these housing companies are pretty smart. Their main cost is land, I believe, and I am certain they build in a nice, fat cushion when they bid on parcels.

And if that cushion starts to get too thin, guess what? They start to cut corners on materials and labor. I understand many of the homes that were being finished in the middle of the last trough are rife with defects.

[jztz]

There are different margins.

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?

[BobbyD]

Brookfield is based here in SD and is a public company. That may be one that we can check on. Also McMillin is another, although they may be privately held.

We have been looking at Stonebridge in Scripps Rch and also at some of the SantaLuz developments and they are not dealing at all. I do know that they are dealing at Del Sur, but they have ruined that development because of their greed, the lots are tiny and the homes very close together. The only exception is Standard Pacific’s Avaron, but they are ridiculously over-priced.

We stopped there over the weekend, I asked what incentives they were providing and I have made it a habit now to ask, just to push their buttons. They gal said none followed by “our homes are still a good value” to which I responded “I would not go that far”.

I look forward to visiting them next year and asking that same question . . . bet she will have a different answer.

[heavyd]

Thanks for clarifying Gross vs Operating margin — I was looking at EBITDA margins to try to get a sense of actual cash margins, but I am not an expert on the accounting standards used by builders. Anyway you slice it, seems there are still fat margins and nobody is feeling any pain yet…besides the guy who bought from a builder 12 months ago!

Brookfield in 2005 has g.m. of about 34%, down to 32% in the June quarter. McMillin as you suspected is a private company. Standard-Pacific is listed and used to have 50%+ exposure to CA; now this is below 30% and includes lots of NorCal exposure.

Anecdotally, one thing I have begun to see in sales listings for homes around Carmel Valley and even Fairbanks Ranch is seller’s willingness to rent or lease out the property.

[Author]

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