Home Builders See Higher Profit Margins Amid the Real Estate Boom
Houses across the U.S. are being sold at high prices, but they can also be expensive to build. How much profit do builders make on a house?
April 27 2022, Published 9:09 a.m. ET
Currently, mortgage rates are the highest they have been in over a decade, largely due to rising inflation in recent months. The real estate market has become more of a seller’s market than a buyer’s. You will likely spend more on a home in 2022 than you would in previous years. While it’s expensive to be a homebuyer, what about being a home builder? Building a home can be more expensive than buying one. How much profit do builders make on a house?
Building a home for your family can be a dream scenario, but in many cases, you’re going to need help. And when you’re looking for a home builder, they're usually contractors or subcontractors that have to pay for certain expenses out of pocket. If you plan to build a home, it’s best to develop a plan with the home builder and figure out how much the construction will cost.
How much do builders make on a home?
For three consecutive years, the average profit margin for home builders has increased, according to CoConstruct. In 2021, the average profit margin was 14.9 percent. The increase in profit margins throughout the years can be tied to the increased demand for homes. Even though the COVID-19 pandemic and national shutdowns were only two years ago, mortgage rates were fairly low in 2020 and 2021 after the Fed reduced interest rates.
Home builders incur certain expenses upfront.
Contractors and subcontractors can usually make around the same amount of profit for building a house, but they can run into many obstacles and expenses during the construction process. Some of the expenses involved with being a construction contractor include material, tools, labor, hiring subcontractors, insurance, and much more.
The first major stage for a home builder, and possibly the most difficult, is completing a contract with the client. In most cases, home builders don't get paid the total amount they’re owed until after the house is built. The house can’t be appraised accurately until it's finished. However, the workers may get paid a weekly income for the labor that they do.
Homeowners will either buy the materials needed for the house themselves or let the builder purchase the materials. In many cases, a contractor might not be able to afford to purchase all of the materials needed with their own money. Many contractors charge higher labor costs when buying the parts themselves.
Contractors may take out a construction loan, which is a short-term loan that’s used to pay for expenses related to building a home. If the owner of the property doesn't make the required payments by the end of construction, contractors may be able to sell the home to recover the money they spent and any construction debt. There are many factors that influence new home construction, so a solid contract is important for the home builder and the client.