Here’s a little cautionary note when comparing new home prices. Many believe it is useful to use a square foot calculation to gauge the cost of a home, and perhaps use it to determine if you’re getting a good deal on the home. It is sometimes a fair way to go about it, so long as you understand that it is at best, a ball parking tool and more often than not, it is deceptive and off the mark.
As a home gets larger, the price per square foot of the home usually gets smaller. And that’s not because the builder is getting his materials less expensively with volume pricing. It’s because there are always fixed costs associated with a home that do not relate to square footage at all, and some that relate only slightly. The price of the lot is fixed. So are other things like clearing the lot, septic systems, etc. These items will exaggerate the cost per square foot, sometimes dramatically.
Here’s an example. Imagine a lot in a new subdivision costs $40,000. Let’s assume a building cost of $125 per square foot. Now, compare a 1,500 square foot home to a 400 square foot tiny home.
Lot Cost: $40,000
Clearing lost cost: $2,000
Septic System: $5,000
This is a $47,000 cost without regard to the dwelling itself.
A 1,500 square foot house would cost $187,000 for the dwelling itself at $125 per square foot. Add to that the $47,000 and the total cost is $234,500 all in. That results in a per square foot cost of $156+ for the lot and all.
A 400 square foot tiny home would cost $50,000 for the dwelling itself at the same price per square foot. Add to that the $47,000 and the total cost is $97,000 all in. That results in a per square foot cost of $242+ for the lot and all.
That’s an $86 per square foot difference. Same lot. Same subdivision. Same builder. Same labor costs. Same material costs.
So, when comparing new homes using the square foot formula, make sure you deduct the price of the lot and other fixed costs first. It is also important to compare upgrades such as decks, kitchen appointments, fixtures, appliances, etc. It is rare you can find two homes to compare that have identical upgrades and appointments.
The bottom line, it is rarely a good idea to consider the pricing based on square footage. It can be done, but not without a fair amount of research into the other costs.