What is builder's margin? How much money builders make?

Typically builders would make anywhere between 200% to 300% margin, i.e. for every
rupee invested they will profit Rs. 2 to Rs. 3. The illustration below, builder is charging
more than 3 times of their cost to end customer. Moral of the story is the margin is high.
This would also explain why generally they don't negotiate, because it takes less than
third of their apartments to break even, which they can easily do with help of investors
and financial institution borrowing, and borrowing from other sources. Managing cash-
flow is key to success in construction business. That is the reason builders rely heavily
on investors and other sources, in addition to financial institutions and banks.

A Desired carpet area, sq. ft. 1800

Load factor to builder (what they charge end user is much
B 1.2
higher)
C=AxB Superbuiltup area, sq. ft. 2160
D Construction cost PSF 1000
E=CxD Builder's total construction cost, Rs. 21,60,000
F Plot size, assumes builder uses 100% FSI, sq. ft. 1800
G Plot cost, PSF, Rs. 900
H=FxG Total plot cost, Rs. 16,20,000
I=E+H Total cost to builder, Rs. 37,80,000
J Load factor (charged to end customer) 1.4
J1 Terrace, sq. ft. 500
K = (A x J) + Saleable area, sq.ft. (this is what you will pay for buying
3020
J1 constructed property in market)
L Market rate PSF, Rs. 4,000
1,20,80,00
M=KxL Market price, Rs.
0
N Parking spaces, 2 x Rs. 2,00,000 each 4,00,000
1,24,80,00
O=M+N Agreement value, Rs.
0
P Builder's total margin, Rs. 87,00,000
Q=I/K Builder PSF effective cost, Rs. 1,252
R=L-Q Builder's PSF margin, Rs. 2,748
S=R/Q Builder PSF margin, % 220%

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 What would it cost you to build your own bungalow?

The table below illustrates simple example of what if you bought plot and constructed
your own bungalow vs. bought same saleable area from builder (say apartment of same
size).

A Desired carpet area, sq. ft. 1800

B Carpet to builtup ratio 1.15
C=AxB Builtup area, sq. ft. 2070
D Construction cost PSF*, Rs. 1,500
E=CxD Total construction cost, Rs. 31,05,000
F Plot size, sq. ft. 2500
G Plot cost, PSF**, Rs. 2,300
H=FxG Total plot cost, Rs. 57,50,000
I=E+H Total cost of bungalow***, Rs. 88,55,000
J Load factor**** 1.4
Terrace, sq. ft., (no cost to you, doesn't cost extra to build
J1 500
terraces)
K = (A x J) + Saleable area, sq.ft. (this is what you will pay for buying
3020
J1 constructed property in market)
L Market rate PSF, Rs. 4,000
1,20,80,00
M=KxL Market price, Rs.
0
N Parking spaces, 2 x Rs. 200000 each 4,00,000
1,24,80,00
O=M+N Agreement value, Rs.
0
P Difference, you save, Rs. 36,25,000
Q=I/K Your bunglow's effective PSF rate, Rs. 2,932
R=L-Q Your PSF savings, Rs. 1,068
S=R/Q Your savings % 27%

* You can assume this cost to be Rs. 1000 PSF if you are planning to manage
construction on your own. Rs. 1000 PSF would give you high quality construction. Most
probably you will hire someone else, i.e. you will hire professional construction firm
Professional construction firm will not charge you just the construction cost but will add
their maring too. So your effective PSF construction cost can be in the range of Rs.
1200 to Rs. 1800 PSF. For this illustration, we have assumed construction cost +
margin of the construction firm be Rs. 1500 PSF.
** Assumed plot is freehold NA and in proper gated community with basic facliities
(drainage, sewage, electricity, water supply, roads).

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*** Your bungalow cost will be higher than this to account for electric meter charges,
water meter charges, legal fees, club membership charges, onetime maintenance
charges, service tax. These costs are not included in this illustrations because you will
incurr those irrespective of you build your bungalow or purchase apartment from builder.
Actual amounts might vary, it is not material for purpose of this illustration.
**** Loading factor is higher at 1.4 to account for the fact that builders typically charge
about 50% to 100% of terraces, and sometimes include terraces in loading.
Conclusion:
If you were to build your own bungalow, savings comes from not having to pay for
loading, not having to pay for terraces. Not only you save, but can go for layout that you
like, no compromise. From the illustrations above and our experience and observations,
we have the following recommendation.
Constructing your own bungalow vs. buying apartment from builder key inputs for
making this decision
Doing the calculations given above on paper and actually doing construction are two
significantly different things. Obviously, construction is highly effort intensive and
stressful activity. That is because; people just wont get your ideas, your vision, and
wont follow you. They wont follow your schedule; they will find thousand excuses for
not doing the work in time and charging you more (and worst yet, there is no safe exit
for you, you will feel trapped). This makes it highly stressful and frustrating experience.
So, word of caution, get into this venture only when you are mentally prepared to handle
the stress and frustration.
This is related to the above mentioned point, make sure you can be physically present
while preparations are in progress as well as while construction is done. Unless you
have not only someone who can trust, but also someone competent, and capable to
deal with architects, construction firm, local authorities and agencies, it is recommended
not to venture for your own construction. It is good idea to buy plot, keep it idle until you
can spend time and be present on site frequently or find someone as mentioned above.
Assuming you are gone past the above mentioned words of caution, next criteria
would be carpet area you are interested in. If you are looking for smaller carpet areas,
say less than 1000 sq ft, it is not advisable to go for your own plot and construct. You
will be better off purchasing apartment or row house in the market. If your net PSF rate
for constructing bungalow is higher than what is going rate in the market, it might not be
worth going for your own plot and bungalow, more so if the land is not freehold. If the
land is freehold, it may still be worth, because you own the land and have flexibility to
reconstruct. The benefit is you own land and that is what appreciates more.
We recommend plot size in the range of 2000 to 2500 sq ft this is because carpet
area is directly proportionate to the plot size (FST=1), generally 2000 sq ft carpet area is
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more than sufficient for a spacious bungalow. We dont recommend bigger sized plots
because it just adds to the cost of the land. Even if you buy 5000 sq ft plot, you are not
going to use all FSI and construct bungalow with 5000 sq ft of carpet area. In short,
most of the times it will be waste to go for bigger plots. It can be individual preference,
because some do like bigger plots.
How is saleable area calculated? What is super built-up area?

Carpet Area: Area between the walls. Carpet area must have permanent roof (slab)
over it, at normal height. Owner must get exclusive rights to use and resell the carpet
area. Carpet area is calculated by multiplying dimension of room, i.e. length x width.
Total carpet area is calculated by adding carpet areas of all rooms. Generally, in
addition to all the rooms, varandas, passages, area inside the main door (if not included
in living room dimension), balconies are included in carpet area. FSI is applicable to
carpet area. Depending upon builder practice, carpet area may be 50% to 70% of of
saleable area. It is always good to find ratio of carpet area to the saleable area, higher
the ratio, better it is. This is just to give you idea of what you actually can use, in
practice it is in interest of the buyers to find out what is carpet area and then apply
loading factor on it (and not do the other way, i.e. should not arrive at carpet by applying
loading factor to saleable area.

The example below will illustrate trick used by builders/developers, when they say you
can find carpet area by applying loading factor on the saleable area.
Saleable Area: 1200 sq ft
Loading Factor: 25% (or 1.25)
Wrong Method (favours seller):
Carpet Area: 1200 x (100-25)% = 1200 x 75% = 900 sq ft
If you apply 1.25 or 25% loading, saleable area should be 900 sq ft + 900 x 25% = 1125
sq ft
As you can see under this method builder is charging you for 1200 - 1125 = 75 sq ft
more
Right Method (favours buyer):
Find carpet area first by measuring actual dimensions, and then apply loading factor
Saleable area = 900 sq ft + 900 x 25% = 1125 sq ft
Terrace: Open area without roof, attached to the main unit that buyer gets exclusive
rights to use and resell (with the main unit). Open areas with slab at least double the
height of the floor are also considered terrace area. FSI is not applicable to terrace
areas.

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Balcony: Open area with roof (slab at floor height), attached to the main unit that buyer
has exclusive rights to use and resell (with the main unit). Generally balcony area is
added to total carpet area. FSI is applicable to balconies.
Dry terrace or dry balcony: Area meant to dry clothes that buyer has exclusive rights
to use and resell (with main unit). If it has roof (slab) at normal height, it should be
treated as balcony. If it does not have roof (slab) at normal height, it should be treated
as terrace.
Builtup Area: Carpet Area + area occupied by walls, doors of the unit. Generally builtup
area is not calculated separately, it is included into the loading factor.
Loading factor or loading or load: Loading factor is a number used for purpose of
arriving at saleable area. It is used to add constructed space not exclusively allocated to
the buyer. Such area generally includes shared areas such as lift/elevator area,
staircases, clubhouse, gymnasium, amenities area, etc. Loading factor 1.25 indicates
that developer/builder is applying 25% on the carpet area. Some builders, in addition to
carpet area, include terrace and balcony areas while applying the loading factor. If the
project does not have lot of amenities, the loading factor should be small. In most cases
loading factor of 1.3 is more than sufficient. Loading factor also includes parking space
(irrespective of it is covered, open, stilt, sold separately or not).
Superbuiltup Area: Carpet area + terrace + balconies + areas occupied by walls +
area occupied by common/shared construction (e.g. lift, stairs, club house, etc).
Generally builders use loading factor on carpet area to arrive at superbuiltup area. For
example, if carpet area is 500, and loading factor is 1.3, then superbuiltup area is 500 x
1.5 = 750.
Usable Area: This is relatively new term. Technically there is no difference between
Usable Area and Superbuiltup Area. Some builders use this term to justify higher
loading factor, typically in Mumbai where land cost is extremely high.
Saleable Area: Generally superbuiltup area is saleable area.
FSI: Floor Space Index. This is ratio of land to carpet area. Generally it is 1 for
residential plots (much less for agricultural land) For example, if FSI is 1, and land area
is 3000 sq ft, then total carpet area on that land cannot exceed 3000 x 1 = 3000 sq ft. It
should be noted that FSI is not applicable to terraces, balconies. Also, this definition is
provided for your information, enforcement of FSI is taken care of by local authorities,
and buyer should not worry about it (unless there are allegations against the builder of
misusing FSI).

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Methods used to calculate saleable area
Builders apply different models to arrive at saleable area. The methods used by builder
can result into as high as 20% to 25% increase in the effective rate. We will try to
explain different methods (not all of them) used by developers/builders and their relative
impact on saleable area, total price, and ratio of carpet to saleable area.
In the example below, it is assumed that the rate is Rs. 4000 per sq. ft, loading factor is
1.3, and it is a 1BHK unit with the following dimensions:

Room or area Dimensions (ft) Area (sq ft)

Kitchen 8 x 10 80
Living room 10 x 15 150
Bathroom 4x7 28
Bedroom 12 x 10 120
Total Carpet Area (C) 402

Dry terrace 4x8 32

Terrace 10 x 13 130
Total terrace area (T) 162

The table below lists different methods/ variations (certainly not all the variations) of
arriving at the saleable area. Please note effect of each variation on saleable area,
total price, carpet to saleable area ratio, and effective carpet rate. Please also note
that calculations done manually don't match 100% with calculations done by
builders/architects because they use CAD software. However the difference in two
method should not be more than +/- 3%. Because of different methods and variations, it
is difficult to "reverse engineer" and find out what method builder has used. It will be
good to find out from the builder if terraces/balconies are charged at 50% of 100%, and
is loading factor applied on those, and what is the loading factor. Most builders don't
answer these questions in written material, and may not even bother to answer even if
you ask. In that case only option for you is try different variations as given below and
"figure out".

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 Total
Load Load Carpet Effective
Terrac price,
Carpet applied applied Calculatin Saleabl to carpet
Method e Rs., (rate
charge to to g saleable e area saleabl rate, Rs.,
# charge x
d at carpet terrace area (sq ft) e area (Total
d at saleable
? ? ratio price/C)
area)
(C x 1.3) + 23,04,24
1 100% Yes 33% No 576.06 69.78% 5,732
(T x 33%) 0
(C x 1.3) + 24,14,40
2 100% Yes 50% No 603.6 66.60% 6,006
(T x 50%) 0
(C x 1.3) +
25,11,60
3 100% Yes 50% Yes (T x 50% x 627.9 64.02% 6,248
0
1.3)
(C x 1.3) + 27,38,40
4 100% Yes 100% No 684.6 58.72% 6,812
T 0
29,32,80
5 100% Yes 100% Yes (C + T) 1.3 733.2 54.83% 7,296
0

Method #1 in above table is legal method (because it charges terrace at 33% of the
area, that is maximum allowed for terrace).
Method #2 is widely used method.

Summary
a) Bigger saleable area does not mean bigger carpet area.
b) Lower rate does not mean good deal because it can result into higher effective rate
because of loading factor, and the way terraces are charged (at 50% or 100% or at
some other %), and if loading factor is applied on top of terraces
c) Method used by builder can cause a big swing in the total price as demonstrated in
the example above
d) Lower loading % does not necessarily mean it is better deal, one needs to look into
how it is applied on terraces, gardens and other areas that are not included in FSI
e) Per square foot rate is meaningless and misleading if not looked in light of the other
factors that influence saleable area.

THE END