Numbers & Deals · Ruben the Builder · 11K views

Real Estate Developer Exposes How To Underwrite A Deal (Steal This Strategy)

The underwriting formula behind every project: reverse-engineer from sale price, cap the land cost, and only break ground at 20%+ ROI.

Full guide: Numbers & Deals →

Underwriting is the skill that separates developers from dreamers, and it’s a formula, not rocket science.

The formula

Sale price minus construction minus land equals gross profit. Work it backwards: start from what the finished product sells for today, subtract what it costs to build, and what’s left is the most you can pay for land while keeping your margin. Land at 20-25% of the final value or less. Minimum 20% ROI, 25% for safety.

Run your own numbers

The developer’s formula: sale price minus land, construction, and ~3% selling costs. Investment build assumes ~10% down + closing.

Target sale priceLand costConstruction + builder fee

$162,000

Est. profit

29%

ROI on cost

25%

Land % of sale

212%

Cash-on-cash

Rules of thumb from the BuildUp playbook: land at 20-25% of sale price or less, and a minimum 20% ROI (target 25%) before breaking ground. Red numbers mean the deal doesn’t pencil yet. Estimates only, not financial advice.

Try to kill the deal

Good underwriting is adversarial. Push your sale comp down, push your construction number up, add a contingency, and see if the deal still clears 20%. If it only works with optimistic numbers, it doesn’t work. There is always another lot; remember the ratio of 1 viable deal per 20-50 evaluated.

Where do construction numbers come from before I have a builder?+

Ask builders for $/sqft ranges on the product type you're targeting, and sanity-check against recent local builds. Your first ghost deals will be rough; by the tenth they'll be sharp.

What's the fastest red flag?+

Land priced above 25% of the finished value. Unless something unusual is true, the margin is already gone at purchase.

Fall in love with the numbers, not the real estate.

Ready to stop watching and start building?

Join the BuildUp Challenge and book a call with our team.

Join the BuildUp Challenge

Watch more on Ruben's channel.

Common questions

What is the rule of 20?

The land can never cost more than 20% of the final build value. On a $1 million home that is $200,000; on a $500,000 home it is $100,000. It is a ceiling, not a target, and paying less is pure additional profit. Break this at step one and the deal is lost before anything is built.

What are the three things to verify when underwriting?

Buildable, comps, and cost per square foot, in that order. If the utilities are not there, nothing else matters. If the comps are wrong, every number downstream is wrong. Cost per square foot only becomes meaningful once the first two check out.

How do I actually run comparables?

Think like an appraiser, who is only looking at available data. Compare square footage, bedroom and bathroom count, lot size, year built, and amenities. Pull about five sold properties into a spreadsheet in columns and look for the differences that explain the price gaps. If several land within a percent or two of each other, that is your number.

Why would a builder work for a 10% fee instead of building his own specs?

Because your project carries no risk for him. When he builds his own spec, he takes the loan and pays the interest, which on a $500,000 house is roughly $50,000 a year of carrying cost. On your project he has no loan, no interest, and no risk. He project-manages with subs he already uses and keeps the fee. Ten of those a year is real revenue on existing overhead.

How do I find spec builders in my market?

Several ways, and Ruben has never found a market without one. Look up the listing agent on sold new construction and ask for an introduction. Pull permit records. Ask subcontractors who they build for. Drive active job sites. Ask wholesalers. Spec builders are visible by definition, because their finished houses are listed publicly.

Nationwide