Guide · Numbers & Deals

How to underwrite a development deal

The short answer

You underwrite a development deal by reverse-engineering from the final sale price. Subtract construction, land, financing, and selling costs to find your profit. The rule of thumb: land at 20% to 25% of the finished value or less, and a minimum 20% return on cost before you break ground. Red numbers mean you pass.

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Start at the exit, then work backward

Never start with the asking price on a lot. Start with what the finished home will sell for, based on real comparable sales in that exact area. That number is the ceiling everything else has to fit under.

From the sale price, subtract construction and builder fee, land, financing costs, and roughly 3% in selling costs. What is left is your profit. If it does not clear the bar, the deal is dead no matter how much you like the lot.

The two guardrails

Two numbers keep you out of trouble. Land should cost 20% to 25% of the finished value or less. And the deal should clear a minimum 20% return on cost, with 25% as the target.

These are not arbitrary. They are the buffer that absorbs a slow sale, a cost overrun, or a soft market. A deal with no margin is not a deal, it is a hope.

Build cost is local, so use local numbers

The single biggest input is what it costs to build per square foot, and that swings hard by market, from around $100 in Dallas to $250 in San Diego. The builder fee usually sits on top of that.

Use a real starting number for your market rather than a national average, then confirm it with local bids before you commit.

Before you break ground, confirm

0/7 done

Run the numbers on your own deal

Plug in a target sale price, land cost, and construction budget. It runs the same formula we underwrite with, sale price minus land, build, and about 3% selling costs, and turns the numbers red when the land runs past 25% of value or the return drops below 20%.

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.

Common questions about numbers & deals

How do you underwrite a development deal?

Start at the exit. Take what the finished home will sell for based on real comps, then subtract construction and builder fee, land, financing, and about 3% in selling costs. What is left is your profit. If it does not clear the bar, the deal is dead.

How much should you pay for land?

Keep land at 20% to 25% of the finished value or less. That ceiling is what absorbs a slow sale or a cost overrun. We reverse-engineer it from the projected sale price rather than starting with the seller's asking number.

What is a good profit margin on a spec home?

We look for a minimum 20% return on cost before breaking ground, with 25% as the target. That margin is the buffer that survives a soft market or a surprise cost. A deal with no margin is not a deal, it is a hope.

How much does it cost to build a house per square foot?

It is local, not national. Across our tracked markets it runs from about $100 per square foot in Dallas to $250 in San Diego, with the builder fee on top. Use a real starting number for your market, then confirm it with local bids.

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