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Accounting for Homebuilders Cheat Sheet by

Key terms and definitions for homebuilding
financial     accounting     analysis

Key Defini­tions

Start
Event at which time constr­uction begins on a fully developed lot
Sale
Event in which home or lot goes "­under contra­ct" with a buyer, meaning the buyer has made a commitment to purchase the asset
Closing
Event preceding sale where title of the asset changes from the seller to buyer and consid­eration (cash) is received by the seller. This is the point that revenue is recogn­ized.
HUD
Short for Dept of Housing and Urban Develo­pment Settlement Statement 1, this form is generated for every closing (lots and homes)
IRR
Short for internal rate of return, this metric is commonly seen in land deals to guarantee the seller a specific return based on cash flows
Escalator
Gradual increases in lot prices by a set percentage over time. Commonly seen in land deals and used by the seller to incent­ivize the buyer to purchase lots more quickly
Draw
Request for funding/ cash based on work performed. Seen in constr­uction lending and mechanics lien jobs
EM
Earnest money or up-front deposits made by a buyer prior to a purchase which are typically credited at closing
Option Contract
Contract guaran­teeing a buyer's right to purchase property. Homebu­ilders commonly supplement their lot inventory by optioning lots from third-­party developers

Average Costs of a Home

 

Housing Trends

Constr­uction Cycle

Acquis­ition
Raw undeve­loped land is purchased by a developer.
Develo­pment
Process of clearing and grading the land so that constr­uction can begin. Other tasks included in this stage include zoning changes, develo­pment of site plans, enviro­nmental impact studies, and constr­uction of common area features (roads, green spaces, border walls, etc.). Time to complete this stage varies depending on the size of the property, but generally takes longer than one year. Large parcels of land are developed in phases.
Record­ati­on/Plat
Site plan for community or specific phase is filed with the city
Sale of Finished Lots
Sale of Finished Lots
Home Constr­uction
Homebu­ilder builds home on lot according to agreed upon elevations and model. Lead time can take anywere from 6 - 12 months depending on the type of home.
Sale/ Closing
Buyer commits to buying finished home. Generally after a 30-day window, home is closed to the buyer.
 

Margin Defini­tions

Gross Margin
Sales revenue less all cost of sales items except for commis­­sion, warranty, and interest expenses
Direct Margin
Sales revenue less all cost of sales items except for warranty and interest expenses
Contri­bution Margin
Sales revenue less all applicable cost of sales amounts

Market Cycle

Inventory Classi­fic­ations

Build-Job
Home where buyer selects floor plan and various interior and exterior details of the home
Mechanic's Lien Job
Home where the buyer purchases the lot prior to starting constr­­uc­tion. The homebu­­ilder then provides constr­­uction services at a "­­co­s­t­-p­­lus­­" arrang­­ement supported by regular draws or payments from the owner of the lot.
Spec
Homes that are either finished or under constr­­uction where no valid sales contract exists
Backlog
Cumulative value of all completed homes and homes under constr­­uction where a valid sales contract exists
QI Date
Short for quality inspec­­tion, this final inspection of the home signifies that it is substa­ntially complete (ie. no longer under constr­uction)

Constr­uction Lead Times

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