We hired a builder about five years ago to build our home. What we found after talking with a dozen (or more) local custom home builders was that the math doesn’t make sense for lower-cost custom homes. A custom home, in this case, is anything that is not a part of a development or subdivision. The GC (general contractor/builder) charges about a 20% management fee on top of all costs that are paid to build the house. GC have minimal full-time staff of their own and use sub-contractors for most everything. Builders with really good reputations might charge up to a 30% management fee. The net income, after the builder’s operational costs (insurance, taxes, overhead) are 10% of the home cost if the management fee is 20%.

A builder can only take on so many projects per year. Typically three or four. The amount of work that goes into managing a $300,000 project (not including land) is mostly the same as one that costs $600,000 or $1,200,000. Why make $30,000 per project when there’s an opportunity for $60k or $120k?

After 2008, I believe banks started being much less willing to provide construction loans to builders, as many went upside down on projects when the market crashed. The bank doesn’t want to repossess a halfway-done new construction project, which is the hardest thing to resell. There are fewer speculative custom homes being built now, compared to before 2008. And builders are no longer taking any kind of risk on projects, so their customers need to acquire financing on their own.

Relatively few banks offer reasonably priced construction loans. We were required to have the land paid in full and also bring 30% as a down payment for the construction loan.