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How fat are the builders' wallets?

Question: How much profit do builders earn on each house they sell?

Answer (pick one):

(A) The idiots don't make a dime; they're just in it for the glory.

(B) They make 20 percent but report only 10 percent to the IRS.

(C) The thieves make great gobs of money, so much that the percentage is too obscene to print in this family newspaper.

If you answered A, you're not alone. Most people think builder profits are disgustingly high. In fact, the general perception among home buyers is that builders are money-grubbing slugs who care about making money and little else.

When asked how much profit they thought a builder earns on the sale of an average house, the median response from the 500 potential buyers surveyed last year by Professional Builder magazine was 21 to 25 percent. But four out of 10 believed profits were 26 percent or better, and 15 percent were certain builders made 40 percent or more per house.

A peek at builders' balance sheets reveals a somewhat different story. And if you're like most consumers, you genuinely will be surprised _ maybe even a little shocked _ at how little most builders actually earn.

According to a recent survey by the National Association of Home Builders, the average pretax net profit per house last year was a reasonable 8 percent. But another, more detailed study found that after builders paid themselves, company profits were only about 4.5 percent.

What's more, even though 1996 and 1997 were the best years for new home sales since 1978, more builders are seeing their profit margins shrink than are seeing them grow.

Of course, it's terribly difficult to sympathize with home builders. Some of them do indeed take home big money. Twenty home-building executives made more than $1-million in salaries and bonuses in 1996, according to a Professional Builder review of proxy statements from more than 40 publicly held companies.

The best paid were Robert and Bruce Toll of Toll Brothers Inc., luxury home builders based in Huntingdon Valley, Pa. The brothers Toll each pocketed about $2-million in '96, the trade publication reports.

Philip Dion, chairman and chief executive officer of the Phoenix-based Del Webb Corp., wasn't far behind at $1.7-million.

Although these and other giants of the industry grab the most attention, the typical builder is a small-business man. Three out of four of the 602 builders who responded to the magazine's compensation survey last year reported revenues of less than $2-million. Only 5 percent had revenues of $10-million or more.

According to PB's study, even after including the whopping pay packages taken by the largest builders, the industry's median base salary is in the $50,000 to $59,000 range. About 15 percent of those who participated in the compensation survey were paid more than $100,000, but a similar percentage made less than $30,000.

Most companies pay bonuses to their CEOs. On top of his $650,000 salary, for example, Bruce Karatz of Kaufman & Broad Home Corp. in Los Angeles was rewarded with a $976,000 bonus in 1996. And Larry Mizel and David Mandarich, top officers in Denver's M.D.C. Holdings, took identical $825,780 bonuses that year.

At the same time, though, half the owners and executive officers who responded to PB's survey said they received no bonus in 1996.

Last year, according to the NAHB's monthly Builders Economic Council survey, very few of the 400 builders queried said they lost money. That's a big improvement over 1990-'91, the last big housing recession, when "a lot" of builders lost money, says David Seiders, the NAHB's chief economist.

Indeed, the profits of most builders rise and fall with the general economy. Some years they don't make a nickel; in others, they do surprisingly well.

Some years ago, I asked a builder friend how much he earned per house. When he confided that he made 30 percent, I was stunned. I had no idea. But when I asked him if he didn't think that was shameful, his response quickly brought me back to reality. "Not when you consider that some years I don't make anything," he said.

Currently, nearly four out of 10 _ 39 percent _ told the NAHB that their profits are eroding ever so slowly. "They're still in business, so they're making enough to continue on," Seiders says. "But their margins are definitely thinning down."

According to the 1997 NAHB Cost of Doing Business Survey, the net margins of the 500-plus builders responding to that more comprehensive study are off, across the board, from the last survey, in 1994. On average, says Steve Maltzman of Builder Accounting Services in Redlands, Calif., a co-author of the survey, the net is down 0.15 percent.

Builders who reported leaner proceeds in the monthly Builders Economic Council study cited factors consistent with a strong but highly competitive housing market. Half mentioned tougher competition, higher labor costs, the buyer's market, price-conscious consumers. And four out of 10 complained about the high cost of land, materials and regulations.

Furthermore, these difficulties are likely to persist. And when the housing market starts to slow, as it inevitably will, Seiders thinks some builders will see their margins erode to the point where they'll have no choice but to shut down.

"As things head down," he says, "some will really take it on the chin."

So, if the builder isn't pocketing a big chunk of the money home buyers pay him, where does it go? For materials, of course, and labor, land and financing. But an ever-larger share goes to government in the form of development fees and charges. Nationally, builders and developers pay out an average of almost $12,300 in utility charges, building and development fees, impact analyses and the like. But the charges vary widely, depending on the location and the price of the house.

In Pittsburgh, for example, custom builder Roger Glunt says the regulatory costs on a $320,000 house built on his customer's lot run about $33,000. In Cincinnati, the fees on a $105,000 starter home built by American Heritage Construction & Development Corp. are nearly $17,000. In Santa Fe, N.M., Chapman Homes pays $20,700 to meet local requirements on a $240,000 ranch house. Builders in Pinellas pay between $4,000 and $5,000 in regulatory costs, depending on the size and value of the house, county officials say.

Lew Sichelman is a syndicated columnist based in Bowie, Md.

The best-paid builders in 1996

Name Salary Bonus Total

Robert Toll, chairman,

Toll Brothers Inc., $829,432 $1,146,938 $1,976,370

Huntingdon Valley, Pa.

Bruce Toll, president,

Toll Brothers Inc., 829,432 1,146,938 1,976,370

Huntingdon Valley, Pa.

Philip Dion, chairman,

Del Webb Corp., 500,000 1,200,000 1,700,000


Bruce Karatz, chairman,

Kaufman & Broad Home Corp., 650,000 976,413 1,626,413

Los Angeles

Nicholas St. George,

president, Oakwood Homes, 450,000 1,133,787 1,583,787

Greensboro, N.C.

Irving Schottenstein, CEO,

M/I Schottenstein Homes, 585,406 843,993 1,429,399

Columbus, Ohio

Dwight Schar, president,

NVR Inc., McLean, Va. 681,000 681,000 1,362,000

Larry Mizel, chairman,

M.D.C. Holdings, Denver 560,000 825,780 1,385,780

David Mandarich, CEO,

M.D.C. Holdings, Denver 460,000 825,780 1,285,780

Leonard Miller, chairman,

Lennar Corp., Miami 467,300 721,200 1,188,500

Robert Strudler, chairman

U.S. Home Corp. 440,000 628,161 1,068,161

Isaac Heimbinder, president

U.S. Home Corp. 440,000 628,161 1,068,161

Laurence Hirsh, chairman

Centex Corp. 530,000 400,000 930,000

Ian McCarthy, president

Beazer Homes 405,000 453,600 858,600

William Pulte, chairman

Pulte Home Corp. 400,000 450,000 850,000

Chad Drier, chairman

The Ryland Group 630,000 197,978 827,978

Timothy Eller, president

Centex Corp. 340,000 175,000 515,000

Alex Engelstein, chairman

Engle Homes 279,583 175,000 454,583

Harry Engelstein, EVP

Engle Homes 213,500 90,000 303,500

Source: Professional Builder magazine