Chuck Shinn, President, Lee Evans Group cshinn@ leeevansgroup.com
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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.
Target
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Typical
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Sale price
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100.0%
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100.0%
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Cost of sales
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70.0%
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78.0-85.0%
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Gross margin
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30.0%
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15.0-22.0%
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Indirect construction costs
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3.5%
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5.0-6.0%
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Financing Expense
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4.0%
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3.0-7.0%
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Marketing expense
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6.0%
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5.0-10.0%
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General administrative expense
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4.5%
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4.0-7.0%
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Total operating expense
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18.0%
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16.0-22.0%
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Net profit
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12.0%
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3.5-5.0%
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