After all is said and done, how much does your builder take?

Wondering how a builder decides how much to charge for a new home? You know you pay for the wood, the carpet, the accessories and all the details, but how is the final price determined?

Buying a house requires a lot of money. Cost is based on many different factors, including construction, land, and administrative and marketing costs to the builder. And, of course, the net profit.

Sound easier to understand?

Most builders will charge similarly. The construction of the house will represent approximately 50% of the base price of the house.

There are several costs within the build factor. There are direct costs, which are sticks and bricks. These are all the materials that go into the home, from wood to concrete and windows to carpet.

The work is usually provided primarily by subcontractors hired by the builder.

Then there are the construction labor costs. These are the costs associated with the work performed by the builder’s employees. These go along with indirect costs, which are generally incurred by the builder’s employees. They include correction work that is done to correct subcontractor errors.

You will also be charged for home construction interest. To finance the purchase of the lot and the cost of construction before paying the builder, the builder takes out a bank loan. The cost of the loan, including all interest and fees, will be calculated on the base price you pay.

The actual cost of the lot can be between 25% and 40% of the base price. With the cost of land steadily increasing, especially near metropolitan areas, the lot portion has increased over the years. Added to your land costs are off-site improvements, such as water and sewer lines, street, curb and pavement developments, and driveways and sidewalks.

Many builders offer a discount off the base price, often paying points at the time of settlement, to encourage first-time buyers. A discounted home will often have construction costs equal to 50%, lot costs of 30%, a discount of 3%, and a gross profit of 17%.

From the gross profit, the builder deducts administrative costs, marketing costs, and taxes.

If you choose options, you can add 10% to 30% to the base price.

Surprisingly, the builders walk away with less profit than they might expect. Net earnings from the sale of a home typically range from 2% to 6%. In general, the bigger the house, the bigger the network.

You can easily find out the net profits of publicly traded builders. You simply have to read their annual reports.

When you are contemplating the construction of a house, sometimes you should take a walk. Compare the costs of similar homes offered by different builders. Ask the builder how much of the cost to build. They may or may not tell you. But it never hurts to ask. You can use this figure to estimate the rest of the costs.