Avoid High-Leverage Financing

Financing expenses include interest on all lines of credit, notes payable and construction loans (including points, fees and closing costs). The target here is 4.0% of sales, but in today's low-interest-rate environment, many builders hold this category below 3.5%. If you're not among them, carrying costs on developed lots and completed inventory homes might be the culprit.

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.