Land value is solved for by taking an expected home sale price and subtracting away all soft costs and hard costs required to get the home built and sold. It also subtracts the builder's required profit margin, leaving a residual value available for the purchase of land.
$1,500,000 (Expected Home Sale Price)
- $1,100,000 (Total Costs Excluding Land Purchase)
- $200,000 (Required Profit)
= $200,000 (Land Value)
A speculative home builder, or "spec" builder is one that takes ownership of a lot and builds a new home on it without knowing who the eventual buyer will be, what the eventual sales price will be or exactly what the costs will be. Estimates are used for each value.
The spec home builder bears the risk of market prices changing between the time they buy the land and the time they sell the finished home. This is often a period of 18–24 months.
They also bear the risk of cost overruns and time delays.
Spec builders incur significant selling costs when a home is sold to the end buyer. This needs to be accounted for when purchasing land.
To account for these risks, spec builders typically target a gross project profit margin of around 15–20%.
After overhead and management costs, a builder's typical net profit margin target is around 12–18%.
When a spec home builder is considering a new land purchase, they make a series of project estimates and use these estimates along with a required profit to "back-into" an estimated dollar value for the property or lot being considered.
We maintain a list of the most active spec home builders in Washington State.
This calculator solves for finished lot value—not raw (undeveloped) land value. If the land being considered doesn't have utilities, roads or sidewalks, the "Site-Prep" cost will need to be increased by a minimum of $30K-$60K.
Builders review comparable home sales in the area and estimate a future home sale price based on those sales.
Builders generally build homes that are similar in size and quality to other homes in the area. For example, if one was building in an area where the median home price is $2,000,000 and median home size is 4,000 sqft, the builder may decide to build a home that is 4,200 sqft and target a sale price of $2,300,000.
Builders don't (or shouldn't) build a 4,000 sqft $2.3M home in an area surrounded by considerably less expensive homes.
When forecasting a new home's value, home builders must consider current prices and predicted market price changes. If general housing market prices decline, the home builder ends up with a smaller profit or even a loss. If prices increase, the profit margin widens.
In competitive markets, spec builders may factor in 4–10% market appreciation during the period they're building the home. This adds considerable risk and can sometimes lead to over-valuation of land.
Market changes significantly affect project and builder success. If housing market market prices end up softening, home builders that used frothy valuations are the most likely to run into financial trouble. This is especially true if they've used a significant amounts of debt to finance their land acquisition and construction activities or have a large inventory of land on their books.
In upward trending housing markets, spec builders tend to do very well because average land purchases end up being more profitable than expected and even poor land purchases can end up looking prudent.
In recent years, market prices have both increased by 15% and decreased by 15% in as little as 12 months. Such changes are enough to double or even eliminate a builder's gross profit.
Valid cost inputs vary widely based on the specific circumstances of each new home construction project:
The default values used here generally reflect current costs and prices for new construction in Seattle and surrounding areas and assume building on a relatively flat 4,000-8,000 sqft lot.
Later in this guide, we will review typical value ranges for each input. These ranges are not intended to encompass the whole range of possible values. The auto-populated input values used in the calculator should be treated as estimates.
Some inputs can be changed to accomodate those trying to determine the value of a lot being considered for a custom home (as opposed to a home to be sold).
|Home Size||Estimated size of the home to be constructed in SQFT|
|Cost Per SQFT||
A spec home builder's direct home building costs are usually around $120-260/SQFT.
|Home Price||Estimate of final home value|
|Plans, Permits & Fees||
Spec home builders typically have lower design costs, usually between $5,000 and $10,000.
If they are building a home they've already designed, the design fees will be even lower.
The remaining part of this line item is reserved for fees due to the permitting jurisdiction and to utility companies. These costs change based on location and typically range from $7,000 to $30,000.
Spec builders generally finance about 75% of the project cost.
They hold the land for 18–24 months and their loan balance grows while building
If mortgage rates are around 4%, a spec builder can likely borrow at around 6%. A good estimate for total financing costs is to multiple the borrowing rate times the home value.
Example: A $2,000,000 home will cost around $120,000 in interest ($2,000,000 x .06 = $120,000) if approximately 75% of the project is financed and the project takes about 24 months from land purchase to home sale closing.
|Misc Soft Costs||Other special or extra costs like getting extra studies or legal fees.|
|Total Soft Costs||Auto-calculated sum of all soft costs.|
Spec home builders typically know what a home is going to cost on a per-foot basis once they get the lot to a baseline state.
This line item is used to make adjustments for extra costs such as demolition of an existing structure ($8,000–$15,000), building retaining walls or extending utilities to the lot.
This value can be huge if the lot hasn't been prepped for a home or if the lot has steep slopes or sensitive areas.
|Direct Home Construction||Auto-calculated using: Home Size SQFT X Building Costs / SQFT|
|Landscaping and Other||
Spec home builders usually limit landscaping budgets to about 1% of the value of the home.
Custom home often allocate closer to 2% of the home's value for a landscaping budget, which often excludes a budget for the construction of decks and patios.
|Total Construction Costs||Auto-calculated sum of all construction costs|
|Total Costs Before Closing||
Auto-calculated sum of the costs that come due before the selling of the home.
Spec home builders need to see how much total capital the project is going to require.
|Broker Commissions||A negotiable percentage split between the listing agents representing the seller and the buyer.|
|Excise Tax, Title Escrow, Misc.||Taxes due on the sale of the property plus fees for title insurance and escrow services.|
|Total Closing Costs||Auto-calculated sum of the costs due at closing.|
|Grand Total Costs||Sum of all costs|
|Gross Profit / Profit Margin||
This is the home builder's target gross profit margin, which usually ranges from 15 to 20%.
In a subdivision with large economies of scale, the required gross profit margin could be as low as 10%.
For a semi-custom, one-off home on a difficult to build lot, the required margin could be 25% or more.
Gross margins are not net margins—the home builder still has staffing and overhead costs and each builder allocates costs differently, often on a per project basis.
If direct construction cost inputs don't assume any overhead for management or jobsite supervision, the target margin will likely need be higher.
|Lot Value||This is the value that remains for the lot once all of the costs have been deducted from the home sale price|
This calculator solves for estimated lot value using assumptions typical for new homes in Seattle and the surrounding areas being built by spec home builders. It can be tweaked to help value land being considered for a custom home. Our guide to building a new home in Seattle may also be helpful.
Please Note: This calculator is subject to miscalculations and poor outputs based on poor inputs. Valuations are rough estimates, and this tool is provided without warranty or representations of any kind. Please contact us if you see room for improvement.