What’s the Average Profit Margin of Single-family Builders?

Industry benchmarks on profit margins, asset levels, and equity positions are important because they allow businesses to compare their performance to their peers, and that can be extremely helpful in identifying areas for improvement and increasing efficiencies. This is the reason why NAHB periodically conducts a survey asking single-family builders nationwide to (confidentially) provide us their income statements and balance sheets.  Complete results can be found in the recently released Cost of Doing Business Study: 2016 Edition, showing that profit margins continue to increase, but have yet to reach 2006-levels.

Builders reported an average of $16.2 million in revenue for fiscal year 2014, of which $13.2 million (or 81.1% of revenue) was spent on cost of sales (i.e. land costs, direct and indirect construction costs), thus leaving them with a gross profit margin of 18.9% ($3.1 million). Operating expenses (i.e. finance, sales and marketing, general and administrative, and owner’s compensation) consumed another $2.0 million (12.5% of revenue), and as a result, builders posted an average net profit (before taxes) of $1 million – a 6.4% net profit margin.

Fig1

Profitability levels in 2014 are the highest reported in the Cost of Doing Business series since 2006. That year, the average gross profit margin for single-family builders was 20.8%; it then fell dramatically to 14.4% in 2008; and has been rising slowly but steadily since, up to 15.3% in 2010, 17.4% in 2012, and 18.9% in 2014.  The net profit margin, meanwhile, went from 7.7% in 2006 to -3.0% in 2008, barely turned positive in 2010 (0.5%), and made significant gains in 2012 (4.9%) and 2014 (6.4%).

Fig2

Balance sheets for fiscal year 2014 showed that, on average, builders had total assets worth $9.2 million in their books that year. Of that amount, $6.2 million was backed up by liabilities (67.4% of all assets) and $3.0 million was held as equity (32.6%).

Fig3

Looking at the balance sheet over the last few years shows that average total assets were not significantly higher in 2014 than in 2012 ($9.2 million vs. $8.9 million, respectively), but both of these years were good improvements over 2010, when assets only averaged $6.2 million. That number was about half the assets builders had reported in 2006 – $13.0 million.

The figure below also shows that builders were highly leveraged in 2006: they owed the equivalent of 74% of their assets to someone else.  As their balance sheets shrank over the next few years though, their reliance on debt declined as well, bottoming out at 64% in 2012.  Relying less on debt to finance their assets meant builders were using more of their own capital to do the job.  In 2006, equity accounted for 26% of builders’ assets, but by 2012, it had jumped ten points to 36%.

Fig4

Further results from the study will be announced at a free webinar being held on Tuesday, March 22, from 2:00 – 3:00 p.m. E.T. Here is the link to register:  Cost of Doing Business Study Webinar.

Finally, the NAHB Economics team is currently conducting a similar survey among residential remodelers. If that is the primary activity of your firm, we need your help.  Without your data we can’t produce industry benchmarks.  Please email the author at rquint@nahb.org to participate.

 



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6 replies

  1. Not right that a builder makes the same ad an agent.

  2. That’s correct, it isn’t right…Unfortunately I work in a REALTOR dominated state where most sales require listing with an agent. And our local commission rate is 7%. Years ago we were one of two markets in the country that were agent dominated. Hopefully in my lifetime we will see this monopoly broken with the internet and other opportunites to reach buyers, and buyers realize they are paying the agents.

    • I am a subcontractor. I would like to point out that builders and subcontractors take on considerably more risk than real estate agents. Therefore the comparison mute. In a free market capitalist society comparing margins between such differing segments is unrealistic. How about hedge fund managers? Should they make what they make?

  3. I am not a realtor but does that 6.4 percent take in factor of what your company pays you and your company vehicles ,your other perks meals etc. I’m in the remodeling business and nothing happens with out a sales person .

  4. Agents don’t make 6.0% or 7.0%. Agents have brokerage splits and operating expenses. The average GROSS BROKERAGE commission on each transaction in my market is 2.837%. The average agent commission after split with the broker and operating costs is 1.121% on each transaction. High producing agents can see averages of 1.6% or so on each transaction largely because of lower commission splits negotiated with their broker. Builders not only take on more risk than agents, but also manage a more complicated business and need much more start-up capital. That’s three reasons why my net profit margin averages about four times more when I build and sell a house than when I only sell a listed property that I don’t own.

  5. This post provides information of a survey about single family builders.  

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