There isn’t a respectable news outlet out there that hasn’t discussed the need for affordable housing and the shortage that comes with it. The problem is, it is very expensive to build affordable housing in areas such as Los Angeles. The myth is that there is a large developer profit margin that could be thinned. Don’t believe me? Here is an example (with the numbers verified by an active developer and project manager).
Let’s say you build a house in the mid San Fernando Valley or in the north east portion. That is where it is typically the least expensive. Because no one builds a single-family home there, it is hard to determine what land value would go for. On an average lot (say 5,000 square feet), many fixers go for about $300,000-$400,000. Let’s split the difference and say $350,000.
Before you start the work, you have architect fees, permit fees, school fees, and more. One is the linkage fee, which took effect last year. That is a fee of between $8-$15 per square foot to build. So, if you were to build a 2,000 square foot home, that is between $40,000 and $60,000 in fees before you touch the house. Preservation costs of tax and insurance can be another $10,000.
Then you get to the cost of building. Labor is now between $180-$200/person/day. That alone could equate to over $200,000 in costs. Now tack on the cost of materials, from lumber and piping to flooring and paint. This also includes complying with all the energy efficiency guidelines such as certain windows, soon to be solar panels, etc.
Therefore, on the lowest end, the cost of building is in the range of $250/square foot. So, in the case of a 2,000 square foot house, you are at $500,000.
Because a developer is not a nonprofit, they have staff to pay, expensive insurance costs, mandatory 10 year warranty costs and make money themselves, we must include some sort of profit. Let’s assume their goal is to make $86,000 for the risk, capital outlay over the 1.5 years.
So, let’s run the numbers assuming there is no financing involved, no staging, and no further expenses once the home is sold:
- Closing Costs and Commissions $54,000
- Cost of Land $350,000
- Cost of Construction and Preservation $510,000
- Profit $86,000
- Resale Purchase Price $1,000,000
The cheapest someone in Los Angeles could buy a new construction, 2,000 square foot home would be just approximately $1,000,000. The problem is there isn’t a buyer for such a property in these parts of town. Therefore, it doesn’t make sense for a developer to build in more affordable areas. These homes would sit on the market and eventually take a large enough price cut for the home to sell. Furthermore, being in Los Angeles, there are other ways to make $86,000 in a shorter amount of time, with less headache, and risk.
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