$ Final Home Value
- $ Total Costs except Land
- $ Required Profit
= Land Value
A spec (speculative) home builder is a builder that takes ownership of a lot without a home buyer in hand. The builder bears the risk of the market between the time they buy the land and the time they sell the finished home. This is often a period of around 12 months. When a spec home builder is considering a new project, they make a series of project estimates and use these estimates to back into a dollar value for the vacant lot or property being purchased. Builders observe comparable home sales in the area and estimate a sales price for the home to be constructed on the land they may purchase. They then back-out all estimated costs to be incurred and determine the required profit margin to arrive at an estimated value for the lot.
Landcast maintains a list of Washington's most active home builders.
Home builders forecast a new home's value based on current pricing and predicted trends. If housing prices decline, the home builder ends up with a smaller profit or a loss. If prices increase, the profit margin widens. Within competitive markets, some spec home builders factor in some market appreciation. During downturns, these home builders are the most likely to go out of business. In recent years, prices have swung both plus and minus 15% in a 12-month period. That's enough of a swing to double or completely eliminate gross profits.
Valuations are rough estimates and this tool is provided without warranty or representations of any kind. Valid inputs vary widely based on the specific circumstances of each new home construction project. Later in this guide, we'll comment on typical value ranges for each input. These ranges are not intended to encompass the whole range of possible values. The initial auto-populated field values should be treated as placeholders or starting points, not as gospel.
Cells in white are editable. Cells in gray are calculated. Edit the sale price, costs and margin requirements and the lot value will be calculated.
Some inputs can be changed to guide those considering the land value of a lot on which to build a custom home to live rather than from the standpoint of a spec home builder. Set the profit margin, broker commissions and excise tax to 0% since the home is not being sold. If an end-user could build a home at the same price per foot as a home builder, land value would always be higher to an end-user than a spec home builder. This isn't the case because an end-user's building costs are almost always much higher than a spec home builders' so the playing field levels out.
|Home Size||Estimated size of the home to be constructed|
|Cost to Build Per Foot||
A spec home builder's direct home building costs are usually around $40-140/FT.
|Home Price||What the home will likely sell for.|
|Lot Value||Calculated by taking Sales Price and backing out costs and required margin.|
|Plans, Permits & Fees||Spec home builders have lower design costs, usually $5,000-$10,000. If they are building a home they've already designed, the design fees will even lower. The remaining part of this line item is for fees due to the permitting jurisdiction and related utility companies. These costs change based on location and typically range from $7,000 to $30,000.|
|Financing Costs||For interest and loan fees related to the project. Varies considerably.|
|Misc Soft Costs||Other special or extra costs like getting extra studies or legal fees.|
|Total Soft Costs||Sum of the above.|
|Site Prep||Spec home builder typically know what a home is going to cost on a per-foot basis once they get the lot to a baseline state. This line item is for making adjustments for extra costs such as demolition of an existing structure ($5000-$12,000), building retaining walls or extending utilities to the lot. This line item can be huge if the lot hasn't been prepped for a home or if the lot has steep slopes or sensitive area.|
|Direct Home Construction||Calculated field of Home Sqft X Cost Per Ft|
|Landscaping and Other||Spec home builders usually limit landscaping budgets to about 1% of the value of the home. Custom home usually have closer to 2% plus extras for decks and patios.|
|Total Construction Costs||Sum of the above.|
|Total Costs Before Closing||Sum of the costs that come due before selling the home. Spec home builders need to see how much total capital the project is going to require.|
|Broker Commissions||A negotiable percentage split between the listing agent representing the seller and the buyer's agent.|
|Excise Tax, Title Escrow, Misc.||Taxes due on the sale of the property plus fees for title insurance and escrow services.|
|Total Closing Costs||Sum of the costs due at closing.|
|Grand Total Costs||Sum of all costs|
|Gross Profit / Profit Margin||The home builder's required gross margin for this project. In a subdivision with large economies of scale, the required gross margin could be 10%. For a semi-custom one-off home on a difficult to build lot, the required margin could be 30%. Gross margins are not net margins, the home builder still has staffing and overhead costs and each builder allocates costs on a per project basis differently.|
This calculator is subject to miscalculations and poor outputs based on poor inputs. Please contact us if you see room for improvement.