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.
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%).
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%).
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%.
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 firstname.lastname@example.org to participate.
Not right that a builder makes the same ad an agent.
And the builder wouldn’t make a penny unless the agent spend $$$ marketing to acquire a customer. Then the time they invest nuturing and guiding the customer BEFORE they even connect with the builder. Ingorant Builders think Realtors doing nothing but walk though thier door with a customer as if the customer called them that day. I build custom homes between 1-2.5M and I can tell you BUILDERS ARE INGORANT when it comes to this subject. I’ve been on both sides as a Sales Manager for local and nation home builders for almost 20 years and a Realtor for almost 10 years. Its a love-hate relationship. The production builder who understand this and caters to or respects what the Realtor does sells much more than those who are always bad mouthing Realtors. Are there some ignorant Realtors that don’t know what they’re talking about and are trying to justify thier commission? Hell ya, but dont throw the baby out with the bath water.
When it comes to a Realtor LISTING builders inventory home, the builder is crazy if he pays agent more than 1% on the listing side. Why? That listing genrates leads for the Realtor that they and in many cases the Realtor sells a competitors home.
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?
The comparison is not “mute.” The correct term is moot. This is a common error.
Most builders who embrace Realtors understand Realtors invest money to aquire a cleint and appreciate what they do. On the other hand, people like yourself look at it as Realtors taking the builders profit. If you changed your stinkin thinkin your business would explode. Realtors know which home builders are “anti-Realtor” and which ones aren’t and choose not to take thier cleint to those builders. Wake up.
I am a consumer who has plenty of experience dealing with real estate agents and home builders. Yes, builders make a lot of profit but they WORK for it. On the other hand, commissions for agents are undeservingly high. What do they do to earn such high commissions these days??? People use the internet to search and screen a house. Potential buyers learn about the school district, property taxes, risk for flood and a lot more all on internet. The only thing agents do is unlock the door of the house and they know nothing about the house. I have MBA and I don’t think I can be a builder with one week’s training, but I can certainly do real estate agent’s work.
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 .
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.
This post provides information of a survey about single family builders.
Sorry to say realtors are over paid period . Using say 6% on a $100,000 home is not the same as 6% on an 800,000home . The effort is all much the same and the more expensive perhaps easier since the buyers pretty well not in need of creative financing and are money savvy. In both case most realtors will tell the buyer only what he ask and no more sometime lacking full disclosure . The builder is under considerable constraints not to mention liability in many states that go 12 years and let not forget the hassles and time to obtain approvals and permits .
As a builder my next life I want to be reincarnated as a realtor .
I have been a real estate agent, am currently a builder, and I am a mortgage loan officer. No question agents are overpaid for the amount of work. Builders take on tremendously more risk. It’s not even a comparison. The problem is there are so many agents with so few deals between them during the tough times that they have to earn a high commission to keep anyone going. Eventually the job will be replaced with computer databases and pre-written forms. I was a DBA for 6 years too. Maybe I should set that up?
I build too and in some cases lenders are over paid. Just like Realtors/Brokers, its a case by case. I’ve seen numerous settlement statement where the lender made more than myself. You’re using the industry norm for listing a home. I and most Realtors in many cases reduce thier commissions. Example: if I’m selling someone’s home I will charge ZERO commission to sell but get paid on the buying side. However I still have a couple thousand in overhead that has to get paid. Professional real estate photography including walkthrough videos, Broker fees, rent, staff, etc to pay and make ZERO on selling.
How much do you think it costs to do this Walkthrough Video whcih is do on ever one of my properties?
Are there other blog posts or articles you’d recommend like this one?
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