Economics of (New Construction & Teardowns In Greenwich CT)
Cher just put an interesting article with recent new spec homes sales in Greenwich. I couldn’t help myself not to look in to its economics, i.e. estimate expenses associated with those projects and see how well (or bad) the builders did:
| Project | Teardown purchased | date | New Construction sold | date | Months in-between |
|---|---|---|---|---|---|
| 16 Boulder Brook | $2,150,000 | 8/1/2006 | $5,832,000 | 11/1/2007 | 15 |
| 64 Old Church | $1,699,000 | 6/1/2006 | $3,750,000 | 2/1/2008 | 20 |
| 980 North | $1,125,000 | 9/1/2004 | $3,375,000 | 11/1/2007 | 39 |
| 7 Butternut Hollow | $1,862,500 | 7/1/2004 | $4,300,000 | 11/1/2007 | 41 |
| 19 Parsonage | $1,995,000 | 1/1/2005 | $4,475,000 | 11/1/2007 | 34 |
| 79 Dingletown | $1,790,000 | 10/1/2006 | $6,787,500 | 11/1/2007 | 13 |
My assumptions of costs associated with these projects were; 7.5% interest rate for financing, 5.0% for real estate commissions, and $280 - $350 per square foot for construction costs (I made $/sf estimates based on the MLS description and the photos of each project):
| Project | New Home (S.F.) | Est. Construction Cost | Est. Interest Paid | Est. Real Estate Commission | Project Net |
|---|---|---|---|---|---|
| 16 Boulder Brook | 8,339 | $2,501,700 | $319,354 | $291,600 | $569,346 |
| 64 Old Church | 5,000 | $1,500,000 | $308,967 | $187,500 | $54,533 |
| 980 North | 10,200 | $2,856,000 | $606,425 | $168,750 | $(1,381,175) |
| 7 Butternut Hollow | 8,743 | $2,622,900 | $794,357 | $215,000 | $(998,016) |
| 19 Parsonage | 8,161 | $2,448,300 | $547,167 | $223,750 | $(739,217) |
| 79 Dingletown | 9,050 | $3,167,500 | $219,617 | $339,375 | $1,271,008 |
Well, spec. building nowadays is no longer a “no-brainer”. In order to make money the builder has to:
- buy land at the right price, i.e. not to overpay for it factoring appreciation
- know who your buyer is; put the amenities that meet buyer expectations without going overboard
- make sure that every dollar spent on construction creates value
- price the new home to sell since the accruing interest can quickly erode profits as the house sits on the market
Yes, you still can make a $1.00MM on a project, but consider yourself lucky if you broke even in the current market.Â
Popularity: 45% [?]
Rate this post - click a star; 5 being the best.
(2 votes, average: 5 out of 5)
Loading ...You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
March 3rd, 2008 at 10:38 am
There still seems to be confidence in certain areas of the market. All eyes seem to be on downtown Greenwich. After speaking with some local builders last week, I’ve received various opinions, but construction costs per square foot was expressed to me as a range of $350-$500.
But I agree with you 100% on the big dent in profits that comes as a result of the carrying costs.
March 4th, 2008 at 5:24 pm
Than a 10,000 s.f. spec home would cost $5.00MM to build? It would take some imaginations (at least for me) to figure out what to put in a spec house to rack up the cost to $500 - unless you imported a XVII-th century castle from Europe.
March 4th, 2008 at 11:29 pm
The figures vary, depending on who I talk to. I’ve had one builder who does work both in Greenwich and the Hamptons give me a quote of $900-$1,000 per sf on some houses.
These new luxury homes are expected to have some very high end finishes and the money to put them together can go very quickly.
Aurora rosa marble, onyx countertops, decorative painting/gold leaf, exterior stone work, cedar wine tasting rooms/cellars, elevators, laundry on several floors, indoor pools, heated garages, completely wired for technology, the list goes on and on…
March 4th, 2008 at 11:49 pm
Would it all go in a spec home though?
I just plugged $500/sf number in my P&L calculations and none of the mentioned project made money. The average loss was $2.00MM! I don’t think builders are in business of loosing money, they are just being dramatic when they throw out those astronomical per s.f. numbers.
March 5th, 2008 at 4:52 am
I don’t think that every new luxury home in Greenwich will have every amenity, no. I’m sure your calculations are accurate and correct - I don’t doubt that.
Of course, these guys are not trying to be in this business to lose money. Although I’ve seen some that have made serious mistakes and they have indeed lost money and some sanity after all was said & done.
I think you said it well by saying the sf numbers are dramatic. Dramatic is definitely a good word - that’s what comes to mind when I see some of these houses. Maybe it also has something to do with a combination of showmanship, optimism, and confidence in the product. However, in my opinion, too much confidence is as bad as none at all.
This reminds me of a recent discussion I had with a friend where we asked the question of why someone would pay $140,000 for a handbag. I think that with luxury products, (real estate included) originality, exclusivity, and status play a huge role in one’s decision to buy. The visceral & emotional experience associated with the way consumers are inspired by luxury products is also a factor.
And let’s not forget the dramatics - or else what fun would it be? :~)
July 3rd, 2008 at 3:44 pm
I think these builders are inflating numbers to protect their profit margins. As someone wrote in before, there are some mistakes but at those rates every home they build is a lost.
March 1st, 2009 at 3:00 pm
As a builder both spec and custom in Greenwich for 15 years now, it is next to impossible to qoute a sq ft price by a conversation. It is a huge misconception that $300a sq will get you this and $600 a sq will get you that.
What I do know is that it is VERY possible to get to $800 a sq in greenwich without really trying all that hard. With that said, $300 is about the average, but again, I need to know a lot more information.
First on spec building- We would purchase a lot for say 2mil, we would then spend 2.5 on construction (hard costs) about 500k on soft costs (ins, interest, etc.) Let’s not forget, 3 years ago we were able to finance 4 million for 4-5% all day long. So, for 5 million we would be looking for a 20% markup off the bat, or 1 million profit. Of couse after negotiations and a 6 month selling time, we would earn about 15% total profit or 750k on a project of this scope. This would take us 18-24 months from scoping out land to purchase, plan, build, sale. those days are gone…..
About custom jobs, again, Please do not be influenced by the magical sq ft. cost. The house costs what you want it to cost. If you want to keep up with the Jones’s or in this case the helmsley’s….then you can spend $800 a sq easy. But it most cases, get your budget, sit down with a architect and a builder. Yes i suggest in these times you lock down your builder immidietely. This way, the architect and builder can work within YOUR BUDGET to get the best possible size and scale for your money.
The reason I say retain a builder is, there are plenty of very good builders available right now. By working with a builder from the beginning stages, you can assure a better building process. Something that 3 years ago you would not have a chance to do because we were all to busy! Take this as the opportunity to get some real attention and real pencil sharpening done in your favor.
April 4th, 2009 at 3:13 pm
I agree. It would take a long time and the chances are quite low. Nice read, though.
July 9th, 2009 at 12:32 pm
Try the book, “BROKEN BUILDINGS, BUSTED BUDGETS–How to fix America’s Trillion-Dollar Construction Industry” By Barry B. Lepatner. My Dad gave it to me for X-mas, he’s an economist.
January 14th, 2010 at 8:27 pm
I just wanted to stop in and tell you that I really enjoyed this entry. It was full of useful information and creativity, both of which we always can use more of.
July 11th, 2010 at 9:04 am
Beautiful Remodeled Townhome! - 3 br Aurora, IL WE SPECIALIZE IN FINDING FORECLOSED HOMES! Interested in Foreclosure Homes as an Investment Or To Live In? We have a SYSTEM in place to help you! Step 1 - Find Foreclosure Homes (We work with the banks) Step 2 - Get Financing to Purchase Step 3 - ….