Expected profits from 25% to 200%
There is no one shoe fits all homesite formula. There are large subdivisions and one house building lots. Some developments need city streets, sewers, utilities, while some lots are already located on established streets with all improvements in place. To give you a better idea of land development costs and profits, I have attached an informative article below.
David L. Fried, Ph.D.
A Specific Example:
The following notes attempt to demonstrate just how big the profit motive is for a subdivision developer.
I take as my example a subdivision that plans to divide up a large piece of land into many two-acre parcels, and to put a 2,500 square foot house on each one of them.
I have studied current listings of houses for sale in the North County area of Monterey County, and find that the median price (50% above and 50% below) is almost exactly $245 per square foot.
This means that the selling price for a 2,500 square foot house would be 2,500 X $245 = $612,500.
Information that I downloaded from ICBO (the International Conference of Building Officials) gives the construction cost for a dwelling in this area as $97.52 per square foot.
ICBO notes that this number includes the building contractor's fee. Thus, the construction cost for a 2,500 square foot house would be;
2,500 X $97.52 = 243,798.
To get an estimate of the cost of the improvements and infrastructure that the developer would have to put in, e.g., streets, underground utilities, water (a well or a hookup to water company, and a distribution system), sewage treatment (sewer pipes with a hookup to a sewer system, or an individual septic system), a drainage system, as well as various county fees, I got information from someone whose work it is to deal with development costs in Southern California. He offered the following information.
For Rancho Cucamonga, he uses $30,000 to $40,000 per home as the cost to provide necessary infrastructure. For Pomona, where the hookup charges are lower, he uses $25,000 to $28,000 per home. In rural areas, he uses $10,000 to $15,000 per home. I'll use the $40,000 per home figure. That will make the developer's profit look smaller.
For land costs, I used a single listing of a large, 143-acre parcel for sale in North Monterey County. It's the only one I could find. The people at Cottage and Castles Real Estate got me a print out. The asking price for this 143-acre parcel is $4,018,000, which means that the land is worth $29,098 per acre ($4,018,000/143). For the two acres that go with each house, the land cost would be $56,196 (2 X $29,098).
When you add up these costs, here’s what you find:
$243,798 Construction Costs
$ 40,000 Improvements / Infrastructure Cost
$ 56,196 Cost of land
$339,994 Total Cost To Produce Each Home
Comparing this to the selling price, you can see that the profit to the developer for each residence in the subdivision would be:
$612,500 Sales Price of Each Home
$339,994 To Produce Each Home
$272,506 Developer’s Profit For Each Home
These figures show that the developer makes a $272,506 profit, per home, for getting the county to approve a subdivision.
(The builder's profit is something else; it's already provided for in the cost per square foot figure).
If the developer can put together a subdivision with 25, 50, 75, or 100 homes his total profit would be:
# Houses Developed Profit
I've also looked at the numbers where the developer just goes through the subdivision process, but leaves the home construction to the buyers of the subdivision's parcels.
Using a figure from a recent newspaper advertisement (today, as I write this, there is only one North County listing) — I found the following:
16 unimproved lots of 1 to 2 acres, in a gated community, are being offered at $295,000 each. I figure the cost of the land plus improvements, using the numbers used in this paper, are;
2 X $28,097 + $40,000 = $96,194 per parcel.
That leaves a profit for the subdivision developer of $198,806 per parcel, or 16 X $198,806 for the entire subdivision.
That is $3,180,896 profit on the development of what is less than 32 acres of land.
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