Cost of Goods Sold of the Real Estate Business – Explained

How does a real estate company work?

Real estate consists of property such as land, buildings, and any natural resource. Real estate also includes commercial properties such as offices, stores, hotels, services, and other businesses.

Industrial properties include structures used in manufacturing, such as factories, warehouses, and research centers. The real estate business primarily used to be buying and selling properties for gains.

However, this has evolved recently and the real estate business now is more inclined towards a mix of selling and providing properties for commercial spaces.

If a real estate company is involved in the construction of their own properties, all the costs of construction shall also form part of the cost of goods sold.

Cost of goods sold by Real estate business

For real estate companies, the cost of goods sold shows up when the company builds and develops for-sale properties.

The company may engage to build an apartment complex and sell various units one by one. Cost of goods sold refers to the costs involved in making the goods or services that are being sold.

It is basically the direct materials, direct labor, and direct expenses involved in making the products. The tax jurisdictions may apply to how real estate companies apply or assign costs to the construction of such properties.

On the basis of nature, there are primarily hard costs and soft costs in real estate development.

1) Hard Costs

In real estate development, hard costs are construction costs associated with the actual physical construction of the property. Based on industrial averages, hard costs make up 70-80% of the total new construction costs.

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Further for renovation projects, this inclines further north of the given range. Hard costs also include material abatement, masonry, doors, plaster, drywall, flooring, etc.

2) Soft costs

On the other hand, soft costs are part of the overall development project. These are however not linked to the actual physical production of the asset.

These deal basically more with softworks as dealing with consultants, preparing project reports, and making planning for the project.

These are pre-construction costs and the majority of the costs are incurred prior to the start of construction. Soft costs also include:

  • engineering costs
  • permits & approval costs
  • inspections
  • legal and insurance costs

The soft cost paid at the beginning of the project and during construction is the Financing Cost. During the initial stage of the development of the project, bridge loans, appraisal fees, Financing Fees, etc. may be seen.

Statement of Cost of goods sold

Real estate companies

ParticularsAmount ($)Amount ($)
Property taxesX 
Management feesX 
Cleaning and maintenanceX 
Leasing commissionsX 
Licenses and permitsX 
Professional feesX 
Property InsuranceX 
Cost of goods sold XXX