26 Feb 2009

Why Does My Home Cost So Much?

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Inquiring clients want to know, “Hey, Mr. Architect. If you’re so smart, then tell me why my home costs so much! It’s only natural to wonder why your home costs so much. That’s the same thing I wondered when I built my home. I saw the signs advertising “Build on your lot for $60/SF” and “Homes from the $100s” but when I built my personalized home, no one offered to build on my lot for $60/SF and no one could build my humble home for $100k. Are builders telling the truth?

Yes, most are but…you may be surprised to learn the most influential factors that affect your home price — economy and scale-economy — are well beyond the custom builder’s control. Think of economy as big market factors such as material and labor availability or supply and demand. Think of scale-economy as localized factors such as your preferences, location and project size. Let’s look at the big picture first.

Supply and Demand: Supply and Demand are inversely related that means as one goes up, the other goes down. If the marketplace wants a particular product, manufacturers increase supply to meet demand. If demand declines, manufactures reduce the supply to save money. This cycle also affects the consumer’s cost. If the product is in high demand (low supply) it commands a higher price and the converse is true too. Ok, but so what? Well, if you apply this logic to personalized homes and remember the 2006 building boom built excess supply, you might assume an excess means lower prices and everything is on sale, but that’s not entirely true. If the housing supply is high, sellers might drop their price to sell an already-built-home, but excess supply means fewer homes in construction reducing the need for building materials. If demand for materials decreases, manufacturers produce less new building materials and material prices may actually increase and that means the material cost of your personalized home may increase!

Next, think about local factors that affect your home price. Remember, local factors are project-specific

Scope and Scale: To make sure we’re on the same page, I’ll explain scope, scale and cost. Scope:  The scope is what you want – the fixtures, finishes, color, details and quality. Scale:  The scale is what size your home is where it’s located and how much stuff you buy. Cost:  The cost is how much you spend on scope and scale. When you want something in your home — paint, granite, ceiling fan, home network or appliances, it costs money. If you want more of something, it costs more money, but cost may not increase proportionally with scale. For example, a client may ask me if he can build a home for $85/SF. I will say “yes, but…(and that’s a big but)…it depends”. It depends on how large your home is. You can build a 4-bedroom 3-bath 8,000 SF home for a unit cost of $85/SF but you cannot build a comparable 2,500 SF home for $85/SF. This is a complicated concept to grasp, but the problem with unit prices is relative costs. Bathroom and kitchens are the most expensive rooms in a home because the fixtures, finishes and utilities increase the cost/SF of these spaces. Assume you want the same bathrooms and kitchen in the 8,000 SF and 2,500 SF homes. If each bathroom costs $12,000, the kitchen costs $58,000 and the utilities cost $30,000, the relative cost for each home is $100,000 or 15% of the 8,000 SF home and 47% of the 2,500 SF home. So what does that mean? It means if you can spread the relative costs over a broader area, you get more for your money. So, to reduce the overall price of the 2,500 SF home, you must reduce the relative cost (size, finish, quality). This is not nearly as easy as it sounds.

“But Mr. Architect, If builders are not busy, then home construction is cheap!”

Not necessarily because materials, labor and overhead costs do not vary significantly among similarly-sized builders. If your low bidder is much lower than the competition, then he either has a cost-competitive advantage, left something out of the bid, bid it low to get the job and hope for change orders or is bidding less service/quality for less money.

“Well then Mr. Architect, if my home is over budget, Can I reduce the size to proportionally save money?”

You can reduce the size to incrementally save money, but to make a drastic difference, you have to holistically address your material/fixture/finish/feature choices and downsize the number of spaces and/or eliminate amenities.

I’m afraid, the bottom line is if you want your home to cost less, we have to do less. My favorite comment is “Well, the architect and builder should cut their fee to offer a lower price.” But is that the right solution? Gee, that’s like your employer asking you to work a six-day work week (instead of five-days) for 20% less money. Would you do that? Probably not, but you might work four days a week for 20% less money. That’s less for less.

When a builder says, “It costs what it costs.” he isn’t being smug. He’s simply saying, “It costs me this much to buy everything and build it.” So your home costs this much because materials, location, labor, overhead and preferences add up.

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About the Author


Your Architect is Eric Faulkner -- an architect licensed in Texas & Oklahoma with 32 years experience in design, construction observation and life.