Chapter Twenty-Two: Financial Picture

At this point, let us use my figures to work out the financial picture, as it would appear upon sale of the house. You cannot possibly expect to use the cost figures which I am using today. They change too rapidly. However, the percentages may be comparably close.

	Cost	Percentage of Total Cost
Land Cost	$60,000	30%
Construction Cost	$90,000	45%
Overhead and Profit	$50,000	25%

Sales Price	$200,000	100%

Item	Charge	Actual Cost	Percentage of Sales Price
Land ($60,000)	6%	$3,600	2%
Plans (Construction Cost, $90,000)	7%	$6,300	3%
Financing	11%	$14,400	7%
Sales Cost	6%	$12,000	6%

		$36,300	18%
Cash Flow to Seller		$13,700	7%

		$50,000	25%

The figures above represent costs, if all services are performed by others. Thus since they total 18% of the sales price and we have allowed 25% for both overhead and profit, we show a profit of 7%. That is hardly enough, so it would be necessary to raise our selling price to bring the profit up to at least 10%, which is a reasonable amount.

However, if the lot was purchased by you directly from the owner and the sale was made by you, the saving would be $3,600 plus $12,000 or $15,600. Add that to your original profit of slightly less than 7% and you have $15,600 plus $13,680 or $29,280 in cash which represents a 15% return.

If you have financed the project completely, you may deduct another $14,400 from the cost and add it to the profit side, which is now $43,680 which is 22% in round figures.

If you have worked on the project, you may deduct the value of your work from the construction cost and add it to your cash income.

Your only cost now has been reduced to the amount invested in plans and specifications. They are usually worth their cost. However, even that may be partially eliminated, if you use the same plans at several different locations.

The results I have shown above are purposefully on the low side. In fact you will probably find that your total costs for a brand new house will allow you a greater profit, if you hold your selling price up to the "going market".

However, I think anyone should be satisfied with a profit of 20 plus percent, especially when it has the best possible security, namely a piece of United States real estate.

In fact I don't know of any other universal opportunity that carries so little risk; may be owned or operated by one individual; can be done on a small scale; need not be in continuous operation but is in constant demand.

It can be done and is being done every day. Those in the business are too busy with their accomplishments to write about them.

The Real Estate Development field has been good to me. I have retired, but my enthusiasm has not diminished. I can still take pride in watching children appear, grow to adulthood and call one of my houses their home. I guess I wrote this book partly to show that all real estate ventures are not put into being by the use of concocted arithmetic. In fact, the more legitimate they are, the more successful they will be. Anyone may become a financial success, but not if he pays most of his potential profit to others.

I intended to conclude this chapter with the above paragraph. However, just yesterday I witnessed a TV program which I cannot leave without comment. It was conducted by a person who was reputed to be the king of all the get-rich-quick in real estate lecturers. He has evidently appeared on several national TV talk shows. He admitted, at one juncture, that he is not interested in making money, because he has more than he needs already. He merely wants to help others become millionaires.

It was near the end of the program and he was interviewing people who had purchased his books. There were all sorts of miraculous statements.

The last individual was a young man. He said as soon as he finished the course, he looked around and found a foreclosed house, upon which was a $47,000 mortgage. It would cost him $10,000 to take over the property and he had no money. His aunt arranged a line of credit by an equity loan on her home and lent him $10,000.

He took over the property and the following week he put a $71,000 mortgage on it. With the proceeds, he paid both the $47,000 mortgage and the $10,000 loan from his aunt and pocketed $14,000. His mentor patted him on the back and beamed his approval for a week's work well done.

To be factual, the week's work had consisted of the young man going $71,000 in debt. If he used his $14,000 to acquire another property, in the same manner, he would be in worse financial shape.