I read an op-ed recently in the Richmond Times Dispatch from someone wondering why builders don’t build “affordable” housing in the $50k - $150k range anymore. Fair question…allow me to give my admittedly simplistic $0.02 to “Mr. Affordable”’s question. The first thing that Mr. Affordable needs to understand is that builders often subscribe to the “1/4″ rule, which suggests that roughly one quarter of the builder’s costs for the home-lot package is allocated to the purchase of the lot. Forget the homebuilder’s profit for a moment, but let’s say that a builder offers a home for $50,000 today. What can he afford to pay for the lot? No more than $12,500. I challenge ANYONE to find such an animal in the Richmond MSA today. In case Mr. Affordable questions why such a lot doesn’t exist, let me offer this: proffers. As you can see, nearly every municipality in proximity to Richmond has proffers which exceed $12,500. What this means is that when a developer requests to rezone land to develop residential lots, they pay a cash proffer which must be factored into the development costs and/or passed on to the builder. So let’s say Developer A purchases 50 acres for $1,000,000 in Hanover or Chesterfield or wherever. They get the land rezoned to allow for 100 lots, but must proffer $15,000 per lot for the rezoning. So already the acquisition and development costs are up to $35,000 per lot. Then comes the engineering, hookups for water and sewer, construction costs, etc. Developer A might get away with hard and soft development costs of $20,000 per lot, but probably something closer to $40,000 per lot. So now we’re up to roughly $55,000 per lot in acquisition and development costs for the developer, which is the BREAK EVEN point, i.e, $0 profit. Factor in a minimum of 25% profit for the developer, and you’re up to $68,750 per lot for the builder. Referring back to our trusty “1/4″ rule, what can the builder afford to offer to the consumer? A $275,000 home.
So why can’t a developer deliver an “affordable” lot in municipalities with low or no cash proffers? Basically, because of the aforementioned acquisition and development costs. The cost of land differs from area to area. So let’s back into what a developer can afford. In the areas where land is most affordable, public/municipal water and sewer are not available. So developers are tasked with creating lots with private/individual wells and septic systems. While the developer doesn’t usually pay for such infrastructure, the builder certainly does. Guess what it costs to install a well? $3,000. A septic system? $4,000. So we’re up to $7,000 already just for the well and septic for a home. If a developer could find some really cheap land in our area for say….$4,000 per acre, they might get 40 homes on 100 acres if the land is really, really good. So for the land acquisition, the engineering, the soils testing, the legal work, the road construction, etc., the developer is up to roughly $25,000 per lot in acquisition and development costs. Add in a reasonable profit….$31,250 per lot. So the developer in this scenario cannot sell the lot to the builder for less than $31,250 per lot (again, such a price point does not exist in the Richmond MSA, or C-ville MSA to my knowledge). The lot though, is not ready for a home. The builder must then fork out the $7,000 for the well and septic systems. So the builder is already up to $38,250 per lot which I assure you is A STEAL in today’s market. You just won’t find lots in that ballpark. So in this extremely conservative scenario, the builder is faced with $38,250 per lot. What can he build and make a profit? A $153,000 home, which is out of Mr. Affordable’s price range.
I hope this diatribe has been informative to Mr. Affordable and to those of you who wonder why “affordable” homes aren’t being built today.