Why does it cost so much to build in Santa Rosa Beach, Destin, Miramar Beach etc.?

Examples: No spray painting allowed. Everything must be hand painted. Limited work hours. Architectural review boards. Higher labor costs. Change orders.

But does concrete, lumber, materials, etc. really cost more here than other places like Tampa, Atlanta or Birmingham?

My Comments:

Homes built in premium PUDs like Watercolor, Seaside, Alys Beach, Rosemary Beach, etc. must be custom designed with plans signed by a registered architect. The landscaping requirements in terms of cost and amount are in proportion to the size and design of the home.

There are restrictions in building such as restricted work hours, no spray painting allowed, silt fences, etc. There is pain measured in real dollars to build in our beach resort area.

This is reflected in the cost of the structure and what it will sell for. There is a large variance in the contributory value of these components. The market will pay more for higher quality homes with high-end finish items. The buyers and builders of these resort type homes are not the same for outside market areas. As a result, there can be large differences in the price per square foot ($100+) for these homes.

Think about it this way. If you are a buyer of a $200,000+ lot, in essence, you are a mini-developer.

As a result, you are entitled to developer’s profit. Developer’s Profit represents the remuneration a typical developer would require to purchase the subject site “As Is”, perform the on-site and off-site land development work, to supervise and oversee the planning and development of the proposed improvements, and “carry” the project through the sell- out period. The percentage of profit can vary from project to project depending upon the risk applicable to it.

More risk, more money.

But how do you measure the compensation?

The four elements of compensation include:

Time Preference: represents the compensation required to overcome time. It is the “riskless” rate of interest on long term, low risk bonds or notes. Such securities are highly liquid, essentially involve no investment management, and carry virtually no risk of principal loss or nonpayment of income. In essence, “time preference” represents the opportunity cost of placing funds in such investments.

Management: The more time, effort and expertise an investment requires, the greater the compensation required to an owner/investor. This is particularly applicable to the subject property, recognizing the degree of time and expertise required for similar properties.

Liquidity Preference: Compensation for sacrificing liquidity is necessary. Real estate represents a relatively illiquid asset, and investors tend to seek compensation to overcome their basic liquidity preference.

Risk: The most significant risk in real estate is the risk of principal loss or decline, income decline, and income instability. Stated differently, compensation is required to reflect the risk of income projections not being realized.

As such, while contractor’s overhead and profit is included in the Cost Budget, actual entrepreneurial profit isn’t realized until the project is sold or stabilized. Furthermore, like direct or indirect costs part or all of this profit may be deducted as functional or economic obsolescence, if the market indicates the current market value of the improvements is less than their current reproduction cost less depreciation.

This is exactly what we experienced from 2006 through 2011. You couldn’t sell it for more than it cost to build it.

So, do you still think you are being Hoodooed on the cost to construct? Maybe. Maybe not. It’s smart to have an expert guide you through your new construction investment to help you measure the compensation.

BBQ: “Professionals never guess—they make it their business to know their business.” ― Michelle Moore, Selling Simplified

BLT: Who You Gonna Hood Doo now by Tony Joe White.