Builder Gross Margins and Owner Builder Savings
January 14, 2016
One of the big motivations for people to build their own home is to save money. After all, it’s a big time commitment and there are some risks involved. I mean sure, you get a sense of pride from building the family’s dream home and you get exactly what you want but that might not be enough for some folks. So it helps to know about how much money can be saved by tackling a new home project as an owner builder.
Current builder gross margins give us an inside look at about how much can be saved when building your own home. For this discussion today we are going to focus on the savings from performing the general contractor role. Most large builders don’t do any of the actual physical labor. Instead, they hire subcontractors to do almost all of the heavy lifting while the builder manages the process by performing the bidding, budget creation, scheduling, quality control…etc.
So let’s take a look at some of the recent financials from the large public builders. Remember, these numbers don’t take into consideration that owner builders will perform some of the physical labor which will increase savings dramatically (by double in some cases). These are just the typical gross margins from the management of the process. KB Home is a large public builder that just announced earnings last week and here are a few key results…Gross Margin = 17.4% on over seven thousand new homes closed.
If you remember back to your business class, the gross margin is basically the sales price minus the cost to build. Then divide the gross margin by the sales price to get the gross margin percentage. So, in the owner builder scenario, the sales price would instead be called the market value. So the value of the home after completion by the owner builder is that which a willing and able buyer would pay for it at that time. So on a home built with a final market value of $250,000, the savings for the owner builder based on the 17.4% number would be $43,500 (for taking on the general contractor role).
So how does the 17.4% gross margin percentage for KB Homes compare with the other big builders? Well, they are actually on the low end. D.R. Horton is another large builder, the biggest in the country, and their most recent numbers showed a 21.73% gross margin. The question for most owner builders becomes, “Is the payoff worth the effort?” When contemplating the answer, be sure to factor in the other potential reasons to build your own home:
- Control – owner builders choose the plan, location, start times, and who does the work (including friends and family)
- Sweat Equity – performing some of the physical tasks yourself can add significantly to the overall savings
- Pride – once the project is completed, you get to enjoy the results for years
These are just a few of the items you might want to consider prior to taking the owner builder plunge. Let us know if you are considering becoming an owner builder…we love to hear the success stories.