Home Buyers
Why Homes Cost What They Do
The named figures are national averages only and may not accurately represent your local market. In fact, many things could affect the price of your new home. Two of the more prominent factors are regulatory costs and level of amenities.
Regulatory Costs
The issue of regulatory fees, environmental or otherwise, has been a heated topic of debate for all involved in the home building industry for some time. The reason is that environmental and/or state and local regulations in some cases significantly impact the cost of new home design plans in certain areas of the country. In the Builders Survey of Construction Costs used in the evaluation at lower right, Wetland Preservation and Impact Fees were included in the cost of the Finished Lot. The Builders Survey concluded that 6.5% of the total cost of the lot, or roughly 1.8% of the total cost of the home, could be attributed to the price of these fees. However, in certain areas of the country, builders have claimed to attribute anywhere from 8-16% of the total cost of a home to regulatory costs. That means that for a $120,000 home, as much as $19,200 could be attributed to regulatory costs!
Regulations vary on the state and local levels, but federal regulations affect everyone. Some of the most common federal regulations that impact new construction include the Clean Water Act, the Endangered Species Act and Occupational Safety and Health Administration regulations. Many local and state regulations also impact the construction of new homes, such as growth controls, restrictive zoning and impact fees.
Depending on where you live, regulations may have a very significant or insignificant effect on the price of your home. If you are interested in knowing the effect of regulatory fees in your area, contact your local builder or local municipal offices for more information.
Can I Afford It?
For many of us as home buyers, the price of building a new home enters our minds in two contexts:
- Can I afford to buy it?
- Do I want to pay that price for this house?
Unless we are licensed appraisers, most of us rarely think about what makes up the cost of the new home. And if we really knew, we might be surprised to find out where the money we are spending is actually going.
The information below breaks down the cost of a detached, single-family home based on national averages from a recent Builders Survey of Construction Costs,
a survey of 50 nationwide builders in 37 metro areas, conducted by the National Association of Home Builders, and averages from the Marshall Valuation Service – a manual used by licensed appraisers.
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Construction Costs (Materials & Labor)
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55-60%
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Finished Lost Costs
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25-30%
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Financing Costs
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2-5%
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Overhead & General Expenses
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5-7%
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Marketing Costs
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2-5%
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Sales Commission
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3-6%
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Profit
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8-10%
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Amenities
The materials that go into a new home comprise a large percentage of its cost. Since both builders and buyers affect the kind of materials that go into home design plans (lumber, floor coverings, paint, etc.), it is important to be especially aware of how these elements can affect its price. When figuring out how much a new home will cost, the common practice has been to price the home out on a cost-per-square-foot basis. As a result, buyers often take home design plans, either from a plan book or one they'd already purchased, to various builders for bids.
In recent years, with the variety, type and quality of amenities rapidly increasing, many builders have found the cost-per-square-foot analysis to be inadequate in giving buyers what they are really looking for. The problem with pricing a home on such a basis is that the different bids given by builders may not be apples-to-apples comparisons. For example, one builder may offer better quality or higher allowances for appliances, lighting fixtures, etc. in their bid than another. Also, features that builders consider their standard amenities often vary greatly. One builder may make it his practice to provide energy efficient heating and cooling systems in all of his homes, which will cost more money. Another builder may make it his practice to exceed local code requirements in all areas of the home.
In the same vein, the specific brand and quality of features you choose to put in your home will also dramatically affect the price. It is estimated that lighting fixtures will cost the average home buyer around three percent of the total cost of their home. But if a buyer decides that he or she must have a $5,000 chandelier in their entryway, the cost of the lighting fixtures and the total cost of the home will be significantly impacted. The same goes for any appliances, doors, cabinetry, flooring materials, etc. that are chosen for a home. That's why two homes with the same square footage can have such dramatic cost differences.
So what's the best thing to do as a home buyer to ensure a fair price on a new home? Make sure home builders guide you toward apples-to-apples comparisons. Find out as much as you can about each builder’s product. Tour other homes they've built. Find out as much specific information as you can about standard allowances, finishes, grades of carpet and lighting fixtures, paint, brick, plumbing and heating systems. Consider how long a builder has been in business and the quality of his homes. Compare one builder’s standard products to another's.
Being aware of where your money is going can be a comforting factor as a new home buyer. Taking into consideration the level of amenities and regulations that might affect its price will help you prepare for a successful building process.