New Home Sale Price Breakdown
The cost of buying a new home is definitely not a small amount. You may have wondered how a builder came to determine the sale price for a new home. We are here to help explain the different factors that go into the cost of buying a new home. These are the average costs for building and selling a new home. The different choices you make in buying a new home can increase or decrease the different factors leading to a much different sales price. That is normal. We have yet to meet the average US family that has 3.14 family members according to the US census, so you should also not expect that your costs will identically match these average home costs.
Construction 59% Cost
The largest portion of the sales price is not surprisingly the construction cost. The construction cost includes all of the physical building materials and specialized labor that is needed to create a home. This might seem like a high amount to people not familiar with construction. This is a large amount since a new home requires a lot of building materials. To make matters worse, the cost of these building materials have greatly increased in the last ten years. For example, the cost of copper has increased over 300% over the last few years and your house needs a lot of copper for the electrical wiring and plumbing pipes. The hourly rate of plumbers, electricians and all other specialized labor has steadily increased. All of these factors combine to make the physical construction cost 59% of an average new home.
Building Lot 22% Cost
The second largest piece of the sales price for new home construction is the actual building lot. Unless you plan on living in a RV, you need land for your new home to sit on. Since the amount of desirable land areas is limited, we have a tough lesson in supply and demand economics. This case of limited supply makes the building lot cost about 22%, which is $68,000, based on the average new home sale price.
Overhead and General Expenses 5% Cost
You probably expected to pay the construction cost and building lot cost. Most new homebuyers do not realize that there are big overhead expenses your homebuilder needs to charge you for. The overhead and general expenses of a new home construction company can be quite large. Think about the salaries for the secretaries and the rest of the office staff. Then think about how expensive health insurance is for that many employees. Then think about the electricity and cost of rent each month for the office the homebuilder. These add up to big overhead costs and your local homebuilder needs to recover this cost somehow. This generally adds about 5%, which is $16,000 for the average sales price when buying a new home.
Sales Commission 3% Cost
Another hidden but necessary cost when buying a new home is the sales commission. Remember how nice the sales associates and realtors were when you said you were planning to buy a new home? That is because these people work on commission. They work hard answering your questions and holding your hand through the buying process. In return, the construction company pays them a sales commission. For an average new home construction project, this is about 3%, which is about $10,000 for the typical new home sales price.
Financing 2% Cost
To make it possible undertaking such a large project of building a new home, most home construction companies take out loans. These loans allow them to buy all of the necessary building materials and equipment, pay their employees and subcontractors, and pay for everything else that comes up. These loans are not free and they gain interest every month. The longer it takes to build the new home and sell it, the higher the financing cost is. This typically adds about 2% to the cost of buying a new home or $7,000 for an average new home project.
Marketing 2% Cost
Another significant cost is the advertising and marketing cost for construction companies. TV, newspaper, radio, mail and internet ads all cost money. Construction companies also need to hire an advertising agency to create these advertisements. This is another necessary cost of doing business that the construction company needs to recover. This adds about 2% cost to the price of buying a new home or $5,000 for the average new home.
Profit 7% Cost
Last but not least is the actual profit margin. After all of the hard work and months of long hours that go into constructing a new home, builders expect to make a profit. Sadly but understandably, this is not a charity they are running. It is a business and like every business, it expects to make a profit. The profit goes to the company, and many construction companies participate in profit sharing with their employees. This may seem like a large sum but when you think about employee profit sharing and the fact that this profit is only paid after many months of work, it is actually not a large number. The profit margin is about 7%, which is about $20,000 for the cost of buying an average new home. In our opinion, this is a small percentage especially considering people leave 15% or 20% tips when they go to restaurants.
When you add up all of these costs, you will see the average total price for new home construction is about $310,000. Please remember this is an average number and it can vary a lot. The size of your new home, the workmanship quality, your personal preferences, your geographical area and many other factors can greatly change the different factors in the cost of buying a new home.