Spring 2012 issue of Horizons

Home Builders

Profitability Is In Sight; A Blessing For Weary Eyes By Steve Hays, CPA

a. Limit the number of lots sold under pre- construction pricing 5. Reduce the number of plans available

At the National Home Builders Association Annual Convention in February, attendees were greeted with, and at times overwhelmed by, something they have not seen in nearly half a decade—optimism! The mood of this national gathering was generally upbeat as evidenced by a crowded exhibitor floor and educational seminars that were largely standing- room only. Despite ongoing concerns expressed by Federal Chairman Bernanke that there is no “silver bullet” for housing and economists predicting gradual recovery starting now and escalating into 2013, it appears a better day is now in sight. As the industry returns to profitability, the importance of managing the components of gross profit percent, including sales price, developed lot cost, direct construction costs and indirect construction costs remains key. RubinBrown experts have compiled 30 ideas for home builders to improve their gross profit: Selling and Pricing 1. Review your pricing weekly or periodically 2. Maximize your premium lots – charge premiums as the market will vary a. Market your “less desirable” lots at the beginning of the project 3. Sell and maximize the options on which you make money a. Group high margin options with low margin items 4. Don’t allow presales to get too far ahead of production

Developed Lot Costs 6. Location, location, location is even more

important today with an even more careful buyer 7. Prepare budgets for land and development costs and update periodically 8. Understand all hidden costs for each lot 9. All costs to “exit” a project should be included in your original land and development budget

Direct Construction Costs 10. Utilize a purchase order system 11. New models should be designed to

attain a predetermined direct construction cost percentage a. Use anticipated sales price and expected profit to determine house to build – Rule of 80% is minimum to achieve which is the combined developed cost and direct construction percentage of sale price 12. Job cost budgets should be prepared to include all options and upgrades 13. Never start a house without a budget for every item in the house 14. Don’t price by the square foot 15. Build specs “wisely,” meaning produce those that are known winners 16. Re-estimate continuously 17. Have detailed direct construction budgets on display homes 18. Use periodic walkthroughs to control costs

Raise Your Expectations

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