Price Does Not Affect Profit

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When we dig into the data from our most recent Builder Financial Study (the 11th consecutive survey of Lee Evans Group clients), we find house prices in 2003 ranging from $98,800 to $3.2 million, but no direct correlation of price and profitability. Thirty-eight percent of the builders had average sales prices under $200,000, 29.

December 01, 2004

Chuck Shinn
Chuck Shinn, President, Lee Evans Group
cshinn@
leeevansgroup.com

When we dig into the data from our most recent Builder Financial Study (the 11th consecutive survey of Lee Evans Group clients), we find house prices in 2003 ranging from $98,800 to $3.2 million, but no direct correlation of price and profitability.

Thirty-eight percent of the builders had average sales prices under $200,000, 29.8 percent fell between $200,000 and $299,999, 16 percent had average prices in the $300,000 to 399,999 range, 7.4% from $400,000 to $499,999, and 8.5 percent averaged over $500,000. We arrayed the builders from the lowest to the highest average sales price, then divided them into quartiles for analysis. (Keep in mind, these 94 builders can't be called "average."

First, we compared each quartile's average sale price to the average net profit, to see if we could find any correlation between the two.

The Low-Price Leaders
The first quartile had an average sale price of $149,000, with a range from $98,800 to $178,400. Surprise No.1: This quartile recorded the second highest average net profit, 8.86%, but had the lowest average sales volume at $34.4 million. The range of net profits for this quartile was from 0.30% to 38.68%. Twenty-nine percent of the builders in this price quartile had profits under 5.0%, while 37.5 percent had net profits in excess of 10%.

The Mainstreamers
The second quartile had a 2003 average sales price of $200,000, with a range of $179,000 to $230,000. This quartile recorded the lowest average net profit of 5.91%, substantially below the results of the other groups. The range of net profits was -1.33% to 12.75%, with 47.8 percent of the builders recording profits under 5% and only 13 percent showing profits over 10%. The average sales volume in this quartile was $43.9 million. This seems to be the most competitive price range. This quartile also had the highest operating expenses average, 19.97%, a full 2.0% higher than the next highest group. That suggests this group probably has the highest concentration of less efficient builders.

The Move-Up Pricers
The third quartile's average sales price was $279,000, with a spread from $230,000 to $360,000. The net profit average for this group was 8.39%, with a range from .51% to 21.46%. Thirteen percent of these builders had net profits below 5%, while 26% recorded net profits over 10%. This quartile had the lowest average for operating expenses at 16.5% and the highest cost of sales ( the combination of serviced lot costs and direct construction costs), with an average of 75.6%. Our target for cost of sales is 70%. The average sales volume for this quartile was $63.5 million.

The Laps Of Luxury
The fourth quartile recorded an average sales price of $623,000, with a range of $362,000 to $3.2 million. This group had the highest average net profit of 10.48%, but the range ran from 0.27% to 24.07%. And 21 percent had net profits of less than 5%, while 46 percent had profits over 10%. They had the highest average sales volume at $63.9 million and lowest cost of sales at 72.46%.

Regional Breakdown
The Southwest builders had the highest average sales price at $396,000, while the lowest average price was recorded among builders in the northern Midwest at $192,000. The South Atlantic region was the second priciest at an average of $382,000, followed by the Northwest at $353,000.

Conclusions
Sales price does not appear to have any direct impact on builder net profits. In every quartile, there were builders with profits under 0.1% and others with profits above 10%. The quartile with the lowest average sales price had the builder with the highest net profit.

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