Estimating Homebuilding Costs

Looking around the internet, one of the most common questions is “how much does it cost to build a certain floorplan?” Or “how much does it cost to build a 2,000 sq. ft. home in X location?” The answers are almost always the same: estimating homebuilding costs is complicated and extremely location-dependent. Two identical homes, one in a Nebraska field and one on an Oregon island, are going to vary wildly in costs. Even before we get to finishing standards etc. The good news is that there are some ways to get into the ballpark with your guesses.

Real Estate Markets are Rational

…or at least real estate markets are somewhat rational. Though it may not feel that way if you live in Portland. But basically, if builders are building homes – and particularly if they’re building mid-market homes (rather than cost-is-no-object luxury homes), then it’s a good sign that they can build homes for about what you can buy them for. So look around the real estate market to see what’s out there in the ballpark of what you want to build. If it’s a 2,000 sq. ft. home in one of three or four neighborhoods, see what roughly comparable homes in the same areas cost. That should give you a rough idea of what it would cost to build one, plus or minus 15% (probably plus).

The rationale is that if building a similar home were fantastically more expensive than buying one, then nobody would be building similar homes. They wouldn’t sell. Likewise, if building were fantastically cheaper than buying (it hardly ever is), then the market for finished homes would slow to a crawl.

Should you Buy or Build?

This is also a good time to reconsider whether you should buy or build a home in the first place. More on that here. But basically, if you’re looking around at comparable properties (“comps”) and see something that you like and that’s in your price range, building may not make a lot of sense. It’s going to take much longer, and there’s a good chance it’ll be more expensive.

Don’t Forget Markups

When you’re looking at comparable properties to figure out what it’ll cost to build a home, keep in mind that finishes and materials can have a big impact on the price per square foot. Also keep in mind that if you’re looking at a set of “spec” homes in a development where the same developer is building all of the homes, those homes are likely going to be cheaper per square foot than you’ll be able to achieve if you’re planning a custom home. The spec homes have economies of scale going for them that you can’t match, and bids from subcontractors will be low per-home since they’re guaranteed a stream of consistent work. The same may not be said for your custom build.

Additionally, if you’ve looked around the market and can’t find a home you like, it may be because you have specific tastes. And specific tastes are often expensive. Maybe you want really big windows. Or a home theater. Or a “green” building full of sustainable materials and passive solar. While there are exceptions, specific add-ons can quickly increase your price per square foot.

Small Isn’t Necessarily Cheap

“But wait!” you say. “I just want to build a small home! That should be cheaper, right?”

While a small floorplan may carry a lower total cost, there’s a good chance it’ll be more expensive per square foot. Thanks to most zoning requirements, even a small home needs to have a bathroom with running water, a kitchen, and power. And bathrooms, kitchens, and utilities, along with the exterior “skin” of the building, are the most expensive components of a home. Square footage in an activity room, for example, is much cheaper – drywall, studs, insulation, and carpet are much less expensive than the finishes in a basic kitchen. So by moving to a smaller floorplan your’e increasing the percentage of the build that is made up of expensive bits. Increasing your price per square foot over a big beige box.

Get the Best Information

Finally, if you really want to know the answer to “how much will this cost,” the only way to find out is to start contacting builders. As the saying goes, everything is worth what someone is willing to pay for it.