What Really Goes Into the Price of a Home?
Understand how homebuilders price their homes (and make money) with this detailed guide to new home sales costs.
A lot of factors go into determining the sale price of a new home construction project. The customer might only see the total dollar figure. But on the business end, every piece or phase of the project is broken down into percentages and values. This guide will explain everything that goes into the price of a home.
Where We Got Our Data
The National Association of Home Builders (NAHB) conducts periodic surveys to understanding new home build costs. The 2022 report contains a lot of useful information. The NAHB asked builders to provide cost breakdowns of their construction projects, providing a national average.
Keep in mind these surveys don’t take into account the number of homes each builder constructs. It simply requests data-based averages and percentages, and each builder’s data is weighed equally. Still, it’s a good starting point for discussion.
Breakdown of Home Price
Good contractors track every aspect of home construction. They know how much every portion of the project costs so they can track their profits and better estimate future builds.
The NAHB survey categories include costs of the finished lot, construction, financing, overhead and general expenses, marketing, sales commission and builder profit. Here, we’ll dive into what each cost involves and their average share of the sales price of the home.
What is the finished lot cost?
This encompasses preparing a piece of land for building. It includes purchasing the lot, grading or site improvements utilities and driveways.
The NAHB survey says finished lot costs make up around 17.8% of the sales price. The average is around $114,622.
What is included in construction costs?
All major portions of building the home itself. These take up the largest percentage of the sales price. Construction costs include:
- Site work (built permits, water and sewer inspections, architecture, etc.);
- Foundation work (excavation, concrete, etc.);
- Framing (framing, roofing system, sheathing, etc.);
- Exterior finishes (exterior wall finishes, roofing, windows, doors, etc.);
- Major systems (plumbing, electrical, HVAC, etc.);
- Interior finishes (insulation, drywall, trim, doors, painting, cabinets, flooring, etc.);
- Final steps (landscaping, decks, patios, porches, driveways, clean up, etc.).
- Because they contain so many different aspects of the project, construction costs average around $392,241. This accounts for 60.8 percent of the total sales cost.
What are overhead and general expenses costs?
These are costs unrelated to materials, permit fees or professional services.
This could be the cost of the home builder’s labor force and insurance on the project. It might also be tools, storage rentals, vehicles, transportation of equipment (also known as mobilization), and other things the builder pays for throughout the course of the project. They can even be taxes.
Overhead can also be off-site costs like software subscription fees, clerical staff, mobile phone service and other indirect items required by the home builder to do business. These are spread over all of the projects.
Overhead and general expenses average $32,979, accounting for 5.1% of the sale price.
How much is marketing?
About 0.7%, or $4,268 of the sale price. This is the average cost of the company’s total marketing budget spread out over each project. In this way, marketing is similar to clerical or office-related overhead.
What are sales commissions?
Realtors and real estate agents make their money from commissions when they buy or sell a home. While many home builders operate as their own real estate agents and avoid a seller’s commission, they must pay the buyer’s commission fee.
The average commission fee for new single-family homes is $23,080, or 3.6 percent of the sale price
What are the profit margins?
As the phrase suggests, it’s the money the contractor makes from the project after everything is paid for. To find this number, take the total sales price and subtract all the builder’s costs. What’s left, in most cases, is the profit.
Every project is different, but the NAHB’s survey says the average profit on a single-family construction project is 10.1%, or $65,369.
There’s More to a New Home’s Price Than Wood and Nails
From the land purchase and site work to framing and trim work, each stage of the project has its own associated costs. With the addition of overhead, general expenses and marketing, even expenses that don’t directly affect the project impact the price of the home.