Building a House in 7 Steps | Step 2: Underwriting Your Build

Step 2 of the series: how we underwrite a build so we know the number we can pay for the land before we ever tour it.

Step 2 of the seven step series, and the one that decides everything. Underwriting a build runs backward: after build value first, then cost to build, then what is left over for the lot. Note that it is ABV, after build value, not ARV. ARV is a flip term. You are not repairing anything.

Start with comps, not with land

Before you can underwrite anything you have to know what you are building. Pull comps on bedroom and bathroom count, square footage, and lot size, and find the finished product that is actually selling. Worked example: the comp is $500,000 for a 2,000 square foot, 3 bed 2 bath home. Now you know the target.

Cost to build: $125 to $200 per square foot

Nationwide the working range is $125 to $200 per square foot for a spec home, meaning entry level construction with slightly nicer finishes if you want them. Not floating staircases. Real numbers we see: $160 to $170 in Oregon, Washington, and California, around $165 in northern Indiana, and $110 to $130 in Florida and Texas.

When a builder quotes $400 a square foot, that is a custom home builder, not a spec builder, unless you are genuinely building a $10 million house. On top of the construction number, add a builder fee of 10% to 15%. Arthur recommends hiring a builder rather than becoming one, unless you already hold a contractor license.

Back into the lot price

Take the $500,000 ABV. Build 2,000 square feet at $150 gives $300,000. Add a $30,000 builder fee and you are at $330,000. The land rule of thumb is 15% to 25% of the after build value, so at 20% the lot supports $100,000. That leaves about $70,000 of profit before financing costs, which is why Arthur would actually offer $75,000 for that lot rather than $100,000.

The buildable lot test: sewer, water, power

Three questions decide whether a lot is buildable at all. Is there sewer, and is it public or private? Is there water, and is it public or private? And how does power reach the property? If sewer is public you are generally required to connect to it, even if the main is 200 feet away, and you cannot substitute a septic tank. A lateral to a main running along the edge of the property might be $10,000. A real sewer extension because the main stops short of your lot is a different animal, and septic needs a lot large enough for a drain field. Crossing a street for power typically runs $3,000 to $8,000. Gas is optional, because an electric furnace and an electric water heater are always available.

Three ways to find the utilities

1. 01

   Call 811 before you dig

   The national call-before-you-dig service sends a locator out to field mark the existing lines. It is free, and crews typically show up within about three days.

2. 02

   Call the city or county

   They will tell you where sewer and water sit. They will not know power, because that belongs to the utility company, so call the power company directly and ask what it costs to reach your lot.

3. 03

   Open the county GIS map

   Search your county GIS or property information center. Most jurisdictions publish an interactive map where you can switch on sewer, water, and sometimes electrical or gas overlays.

Then, and only then, check zoning

The order matters. Numbers first, utilities second, zoning third. There is no point running a full zoning analysis on a lot with no sewer, water, or power. Once the first two clear, zoning tells you whether you are building a single family home, a duplex, or a fourplex, and that changes the whole model.

One more thing the utility research buys you: negotiating room. If you discover the sewer lateral costs $10,000, that is a documented $10,000 price reduction to ask the seller for.

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Common questions