Another Canadian real estate developer is asking buyers to cover soaring material costs. Delpark Homes, a Greater Toronto real estate developer, is the latest to ask buyers for a top-up. Recently soaring material costs, such as lumber, have crushed homebuilding margins.
Since new homes are often bought years ago, an unexpected rise in costs can threaten a project. If material costs rise higher than the amount collected to build it, the developer has three choices — absorb the costs, cancel the project, or ask for more money. This developer is taking a swing at more money, like a few other developers have. More and more developers will likely be forced to follow in the near-term.
Another Real Estate Developer Is Asking Buyers To Pony Up More Cash For Lumber
Another Greater Toronto home builder is asking buyers for some
gas lumber money. In a letter sent to existing buyers, they explain lumber costs have increased by 300%. Also mentioned is an additional 15% increase in other material costs.
“We were willing to absorb the costs at the time we signed the amendments, but this is too big of a hit to absorb,” wrote the developer.
Source: Letter sent to existing buyers at one project this week.
Lumber Prices Killed Home Builder Margins
Typically developers plan a margin that allows for a rise in material costs, as well as a little profit. The industry standard is about 18%, which provides a decent cushion in normal times. In an environment where lumber increases by 200% over a year, and other materials rise 15%? Not so much. That’s an unpredictable rise that pretty much no one could have forecast.
Many homebuilders would have to pay out of pocket to build a home, if they didn’t ask for cash. That’s if they can even obtain the financing without deep reserves. Most would have to go out of business pretty quickly if that happened. Instead, they ask homebuyers for a top-up on the expenses. It’s usually in the fine print of the pre-sale contract that people rarely read.
In this particular case, the buyer is being asked to pay an extra $40,000 in additional fees. That’s the cost of an actual home in parts of the United States.
Lumber Squeeze Has The Industry Suggesting People Delay Lumber Purchases
In case you missed it, lumber is one of the most random stories this year. Prices have increased over 200%, adding about $40,000 to the cost of building a home at the current level. It’s gotten to the point where a lumber exec even told people to put off discretionary projects. He, amongst others, is forecasting lumber prices will correct substantially by year-end.
Lumber prices are currently crashing, but are still much higher than a year ago. A lot higher. Prices are expected to fall even further, but it’ll take a while before they actually start to return to normal levels. In the meantime, new homebuyers might want to stash away a little extra cash, in case you get the dreaded letter.
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