I cannot tell you how many people start their home search in the Raleigh area looking for a lot with acreage. If not acreage, then many people want at least a 1/2 acre lot with a large private back yard. Of course, many of these same house hunters want a nice neighborhood with a pool, tree lined streets, and they want to be very close to shopping and restaurants.
I can’t say as I blame them. Heck, that description sounds pretty good. And with the right budget, it is available and obtainable. But is it reality when there are financial constraints… e.g, how much house you can afford? So that you’ll be more empowered to make wise choices when shopping for a new home, let’s discuss the reality of new construction and how the cost of a home gets distributed between all these things.
When a builder wants to build new homes in Raleigh, or any other city, the very first step is to find suitable developed land. I say developed because most builders do not have the financial resources or the expertise to put together a planned neighborhood on their own. So, builders almost always work with a developer to get building lots.
The developer is the person, or company, who takes the initial financial risk by purchasing a large tract of land and installing the infrastructure for a neighborhood. This usually consists of streets, run-off water management systems, sidewalks, street lighting, and any amenities such as lakes, common areas and parks, pools, tennis courts, and club houses.
If you are planning to buy new home, then Parc Central Residences is the right choice. You will get the best home from the place. There are streets and light for the comfort of the buyers. The financial risks are low at the place for the people. The investment is less to benefit the buyers.
Once this has been done, without any financial return to the developer, building lots are ready to be recorded and sold. Prices for a 1/4 acre building lot will typically run anywhere from $40,000 to $75,000 in what most people would think is a nice neighborhood that happens to be anywhere close to shopping
The $40,000 lots are typically in neighborhoods where there will be fewer amenities and the $75,000 lots will deliver more amenities. The average construction costs, including the lot, typically run anywhere from $110 to $150 per square foot. The construction cost is also where the finished amenities and features of the home start to make a difference in the price. One more thing to keep in mind is that a good economic rule of thumb is that the lot should only be about 20% of the price of the finished product.
Using these figures, lets do an example of each extreme.
First, the lower cost model. Assuming $40,000 for a lot, $110 per square foot construction costs and following the 20% lot cost rule, here is what we will end up with. The total finished cost of this new home would be about $200,000 if the lot is 20% of the cost. ($40,000/0.2) At $110 per square foot, (200,000/$110) the house would be about 1818 square feet. Because the lots were lower in cost, it is probably fair to assume that the developer had to omit a few of the higher end amenities such as pools, parks, lakes, and tennis courts.
Now let’s look at the higher cost model. This time, let’s assume $75,000 for a lot, $150 per square foot building costs, and let’s follow the same 20% lot percentage rule. The total finished cost in this case would be $375,000. And, at $150 per square foot, the home would be approximately 2500 square feet. Now, because the developer had almost double the money to spend developing the land, it would be safe to assume that higher end amenities would start to show up in the neighborhood.
I hope these examples help explain why a large building lot in a new neighborhood is difficult to have at an affordable cost. It’s not impossible, it just costs more. I also hope these examples help to illustrate why there can be such a wide variance in what you get at any given price point in new construction.
Are there exceptions to the basic rules of home construction I have given here? Sure there are. Location is the largest determinant of price for any real estate, and that includes land that can be developed into a neighborhood. Construction methods can also create variance in the numbers. A crawl space foundation costs more than a slab. Brick costs considerably more than vinyl. Granite counter tops cost more than Formica. And so on.
There are a lot of moving parts, so to speak, in any residential real estate construction project. And as a result, the price of the finished new home can vary quite a bit. The most important thing to remember is that as the cost of the developed land increases, it has the biggest impact of any factor on the finished cost. In our lowest cost example, a 1/2 acre building lot could end up costing $80,000. If the 20% rule is followed, now we are talking about a $400,000 house, rather than a $200,000 house.
If you want to discuss how this works and the best way to use it to your advantage when buying a home, give me a call at 919–602–7000, or send me an email message. Knowledge is power and a thorough understanding of new construction costs will be a big step towards getting the very best deal possible on your next new home.