| Chuck Shinn, President, Lee Evans Group cshinn@ leeevansgroup.com
|
If your financing costs are high, reduce your leverage. I like to see the debt-to-equity ratio between 3-to-1 and 5-to-1. But banks are throwing so much money at builders that I see ratios as high as 14-to-1. High-leverage builders have high loan-service costs and are more exposed to interest-rate risk - not a good idea. With the economy strengthening, there could be upward pressure on rates.
Try to move from individual construction loans to a revolving line of credit. That cuts points and fees. Also try to negotiate a lower spread between the interest-rate index and your rate. However, probably the best way to reduce financing costs is to cut construction times and the number of spec houses in inventory.
|
Target
|
Typical
|
|
|
Sale price
|
100.0%
|
100.0%
|
|
Cost of sales
|
70.0%
|
78.0-85.0%
|
|
Gross margin
|
30.0%
|
15.0-22.0%
|
|
Indirect construction costs
|
3.5%
|
5.0-6.0%
|
|
Financing Expense
|
4.0%
|
3.0-7.0%
|
|
Marketing expense
|
6.0%
|
5.0-10.0%
|
|
General administrative expense
|
4.5%
|
4.0-7.0%
|
|
Total operating expense
|
18.0%
|
16.0-22.0%
|
|
Net profit
|
12.0%
|
3.5-5.0%
|
Advertisement
Related Stories
Hamlet Homes' Mike Brodsky on Finding Successors and Letting Go
A transition that involved a national executive search, an employee buyout, and Builder 20 group mentorship to save the deal
Time-Machine Lessons
We ask custom builders: If you could redo your first house or revisit the first years of running your business, what would you do differently?
Back Story: Green Gables Opens Up Every Aspect of its Design/Build Process to Clients
"You never want to get to the next phase and realize somebody's not happy."
