Q&A / 

Building Cost

DEAR TIM: I purchased some building cost software to try to help me calculate the cost of a house I want to build. However, the costs I’m getting back don’t seem to be accurate. Is there a simple and foolproof way to go about estimating home building costs? I’m trying to do this before I spend lots of money on blueprints only to discover what I want is out of reach for my budget. Surely others struggle trying to estimate house building costs. Connie L., Chicago, IL

DEAR CONNIE: The building cost estimator you’re using may not be adjusting correctly for your market conditions. There also may be some settings that you overlooked that have you comparing apples to onions. There are so many variables that come into play when estimating building and remodeling costs, it’s a miracle that any of that software works.

This home will be finished soon. The owners got very close on the actual price by comparison shopping. PHOTO CREDIT:  Tim Carter

This home will be finished soon. The owners got very close on the actual price by comparison shopping. PHOTO CREDIT: Tim Carter

The first challenge you have to consider is that building cost data is different for varying cities and regions. Usually there are settings in software that track the costs in many cities and states. But these can be inaccurate depending upon the level of fit and finish you’re looking to achieve.

Think about new cars for a second. Most have four wheels, an engine, transmission, doors, varying sizes, etc., but they can have vastly different prices. A Mercedes Benz is going to cost you much more than a Kia, although they will both transport you from point A to point B. This is true in houses.

To get a pretty close approximation of the current construction building cost in your city or town, you just have to go on a tour of new homes for sale. Be sure to visit ones that have been recently constructed. I would look at ones in all different price ranges so that you can get an idea of the level of quality of each home. Some will have standard appliances and finishes. Others might have premium and top-quality appointments. Take great notes.

One thing you have to consider is the length of time each house has been on the market and if there have been price reductions. The state of the current economy is causing a certain amount of deflation as sales prices are lowered to get houses sold. This means that a house might currently sell for less than what it actually cost to build. Be careful and ask lots of questions to see if this is the case in your area.

Assuming that the marketplace is fairly stable, here’s a method of generating home building cost estimates that should get you fairly close to the number you’re looking for. I generate new home building costs by trying to back calculate the cost to build the house per square foot. Once you know this number, you multiply it by the projected size of your new home to get close to the actual cost.

Start this process by finding one or two homes that have lots the size you expect to have and the houses are close in size, style, and finish level that you desire. It’s very important all these things match. Even better, make sure the houses you’re looking at are in the same neighborhood if possible. Prices of the same house can vary depending on the community they’re in.

To determine the approximate construction building cost, you need to back out the cost of the lot and any sales commission. I would estimate the sales commission at six percent. To determine the cost of the building lot, you’ll have to look for lots for sale that are similar. I would talk with knowledgeable Realtors. Don’t forget to account for utility connections. In other words, the new houses you tour may be connected to city sewer and water and you’re looking at lots that need a well and septic system. It can be very complicated.

Once you subtract the sales commission and lot cost from the asking price of the new home, you then calculate the actual square footage of finished living space. Leave out garages and unfinished basements from this calculation.

I prefer to always calculate this using the dimensions of the outline of the exterior walls. Don’t fall into the trap of using room sizes. Get the overall square footage. Divide this square footage into the cost of the home less the sales commission and lot cost to arrive at the cost-per-square-foot of that house.

This method of determining home building cost estimates is not foolproof, but it will get you close. The key is to make sure the houses you’re using as your benchmark match what you want as closely as possible. If you don’t match this up, you can easily be off by a factor of 25-40 percent!

If you’re planning a custom home, you then need to add in the cost of the plans. They might easily run 5 to 6 percent of the cost of the home. You can get plan estimates from architects that draw custom homes.

You can also talk to custom home builders to get a range of building costs per square foot. Be sure to talk to several builders and go look at recent houses they’ve built to see if you’re looking at houses that match what you want.

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