Quoting a price for construction of a new home is one of the hardest things to do because every home is unique and truly there are no two houses exactly alike, even if it is only the lot that makes them different.
Perhaps one of the most significant factors to cost of new home construction is the local region. Local building codes and labor play a major role in the cost of new home construction. Local building codes vary widely by region. For example, in warm climates building codes often do not require high-performance windows, higher insulation values or advanced heating, ventilation and air conditioning (HVAC) systems. Strict building codes or lack thereof makes a significant impact on the cost of constructing a new home.
Local labor in certain parts of the country is also higher than in other portions of the country. In places that unions are prominent in residential new construction, prices will generally be higher too. Strong unions tend to set the upper price point for skilled labor and it seems non-union wages are higher in areas with stronger union representation. As a general rule, places that have excess labor will have lower labor rates. Because of the recession and the real estate new construction depression, the price of labor has been generally falling around the country the last few years. This trend will continue until the supply and demand of labor reverses itself.
Although not included in the cost of building directly, land prices are easily the biggest factor in home and lot package. The cost of a lot in a city like Los Angeles, New York or Chicago could easily cost more than a home with a lot located in Indianapolis or Minneapolis. Also, lot improvements can be a hidden cost if the lot is not previously engineered by a land developer. Soil corrections, raising or lower lot elevations, sourcing utilities not on the edge of the property, drilling a well or installing a septic can all add large costs to the budget. If the lot is not pre-engineered by a land developer, obtaining at least one soil boring (four is best) where the house will be located is a very smart idea before you close on the purchase of the lot.
Finishes are another big contributor to the cost of construction. I have heard some rich and famous have built houses exceeding $5,000 per square foot with the major difference being extremely high-end finishes. Gold plating things can add up quickly. For us regular everyday type folks, even things like kitchen appliances (stove, dishwasher, microwave/hood, and refrigerator/freezer) can cost as little as $2,000, but can easily cost $25,000 for appliances that basically do the same things, like cool and cook food. Lighting fixtures can be much the same story. You can purchase lighting fixtures at your local Home Improvement store for as little as $500-600. Conversely, you can purchase a single dining room chandelier for a few thousand dollars or ten of thousands. In the case of the rich and famous, the sky is the limit on this stuff.
Having a green building background, I also know that green building can cost you your green (cash). There are a lot of builders selling “green bling”. “Green bling” are things that consumers have heard about and want added to their home and either have a slow payback or no payback at all. Unscrupulous builders can take advantage of a buyers desire to be environmentally conscience by selling a bunch of upgrades that are not only expensive, but are not really that green.
For the average American, building a new home will vary depending on the factors above and more, but in general the higher the square footage, the lower the cost per square foot and vice versa. The majority of houses I have seen around the country range from a low of about $80 per square foot to a high of $300 per square foot. In the Midwest, a good guideline is to budget for $150 per square foot on the main floor, $100 per square foot for the second story and $50 per square foot for finished square footage in the lower level. To these budget numbers you add the lot cost and lot improvements and you should be in the ballpark. For example, a 2,400 square foot two story home with 1,2000 square feet on each floor would cost approximately $380,000.000 with a $80,000 lot. In a down economy the pricing will be lower and higher in an up economy. There are wide differences in the quality of construction at the same price point between various builders.
As you can see, there are many factors that go into the cost of a new construction home and therefore it can be very hard to compare pricing between builders. Sending out a set of plans for bid does not mean you are comparing apples to apples. Builders are smart and know how to cut costs to win a build, but that does not mean you are receiving the best value.
Larger builders tend to deliver the most square footage for the least amount of money, but have cost reduced the product to make that happen. Cost reduction usually means materials are on the lower end of the price spectrum. You will see things like hollow-core pre-painted doors, plastic or pre-finished trim, vinyl floors, shower inserts, vinyl siding and the list goes on and on and on. While lower cost materials does not necessarily mean lower quality, there is a definite difference between homes built with higher quality versus lower quality materials. Square footage, house floor plan and granite counter-tops shouldn’t be the only considerations if you are planning on living in that home more than 5-10 years.
On the other hand, smaller builders tend to provide custom type construction with higher building materials, but can come with their own set of challenges. Smaller builders may not have adequate staff to provide the customer service you may be looking for or may not even be in business in five years. Many smaller builders fail to run a very tight ship financially and the cost of your project could easily be over budget. Also, using a smaller builder does not guarantee a quality built home. It is best to do your homework on any of the builders you are considering.
As a builder myself, we use an open book methodology. This means the consumer sees all actual costs and the actual builder’s profit. I am not advocating our system over another, but I find in todays’ world of educated consumers, consumers understand a builder needs to make a profit and seem to be more comfortable when that number is fully disclosed. To that end, I have never had a customer come to us and ask us to cut our profit.
I am not sure I adequately answered the question “How much will building a new home cost me”, but hopefully you have a better understanding of the things that attract cost and some ideas about how to go about selecting a builder.
