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

Wonder how a builder decides how much to charge for a new house? You know he pays for the wood, the carpet, the fixtures and all the details, but how is the final price determined?

Buying a house requires a lot of money. The 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 construction factor. There are direct costs, which are the sticks and the bricks. These are all the materials that enter the home, from wood to concrete and from windows to carpet.

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

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

You will also be charged construction interest on the home. 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 into the base price you pay.

The actual cost of the lot may be between 25% and 40% of the base price. With the cost of land constantly rising, especially near metropolitan areas, the lot portion has increased over the years. Add to your land costs any off-site improvements such as water and sewer lines, street development, curbs and paving, and driveways and sidewalks.

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

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

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

Surprisingly, builders walk away with less profit than might be expected. The net proceeds on a home sale often range from 2% to 6%. In general, the larger the house, the larger the network.

You can easily find out the net profit of the builders that are publicly traded companies. You simply have to read their annual reports.

When you’re contemplating building a home, sometimes you have to shop around a bit. 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.