Why Building a House Is so Expensive

Purchasing a new home isn’t always a seamless process, but neither is building one from the ground up. In fact, building a house is not only more time-consuming but more costly.

Why the difference in price? For starters, if you want to deck out your home with all the bells and whistles, it's going to cost you. Plus, you must purchase the land and cover the costs associated with the building plan and permits. Here’s a closer look at the factors that make building a house so expensive.

Land Shortages

When you buy an existing home, the cost of the land is built into the asking price. This is usually the case for master-planned communities as well. But when you build a home on your own terms, you have to find and purchase a lot. And if you’ve ever tried searching for land, you'll know the cost can be prohibitive, particularly if you’re looking to build in a metropolitan area.

Key Takeaways

  • Building a house adds costs for land purchase, the permitting process, and multiple inspections.
  • The farther your plan strays from a standard model, the more costly it will be.
  • Buildable lots in urban areas can be prohibitively expensive.

Thinking of ditching your search for land for a master-planned community? You may still have to fork over a considerable sum of cash, especially if you're looking in or near an urban area. A CNBC report indicates that buildable lots are much more costly in urban areas, making profit margins lower for builders. Not surprisingly, builders will pass those higher costs to you.

Elaborate Custom Designs

Building from the ground up grants you the freedom to create the home of your dreams. The catch lies in how elaborate your dream is. The more complex and non-standard the plan, the more you’re going to spend.

Expect to pay between 5% and 15% of the total construction costs for the residential architect’s services.

Real estate site Zillow suggests keeping it simple to minimize planning and building costs. “Look to the early 20th century suburbs for inspiration and lessons on the elegant simplicity of the box,” the website recommends. If your builder has a choice of pre-existing plans, you can minimize costs by tweaking an existing design to suit your needs instead of insisting on a completely new one.

Complex Plan and Permit Processes 

Plans must be submitted to your local building and permit office. If there are issues, they’ll be sent back to the builder for revisions. Even after their approval, the builder must secure a permit to begin construction.

These costs vary widely from one state or city to another. You might compare nearby properties in advance to see whether a move of a couple of miles can make a big difference in your construction costs.

In any case, the permitting process is rarely as seamless as it sounds. Staffing is one issue. A survey by John Burns Real Estate Consulting of 100 builders around the U.S. found considerable frustration at understaffed planning and permit offices. 

Mandated plan revisions—to make sure the house meets building codes, for example—may entail considerably more work, at your expense. “When a builder has 25 changes or more, that’s a lot of work to get the plans up to the new code,” Stephen Paul, executive vice president of homebuilding operations at Maryland-based Mid-Atlantic Builders, told CNBC. More requirements to reach code equal more time and labor—and higher charges to the homebuyer.

Costly Upgrades 

When you strolled through the builder’s model home, was it love at first sight? Unfortunately, what you see isn’t necessarily what you’ll get in your new home at the advertised price. Most custom-built homes come with standard features, and you’ll pay more for each item you upgrade.

Before hiring, check into the builder's reputation and make sure the business has a warranty.

Hardwood floors, crown molding, vaulted ceilings, screened-in patios, marble countertops, and accent walls all come at an added cost. A word to the wise: Don’t allow the builder to coerce you into purchasing fancy upgrades you can’t afford. Upgrades can be installed later when you have more spare cash.

Inspection Costs 

Multiple inspections are required by law to ensure that your new home is up to par and complies with local and state regulations. The builder may handle this for you, but guess who’ll be covering the costs?

It’s best to have a final inspection done by an objective party that you (not the builder) hires before signing off on the new house.

Meeting Regulations

Builders also increase their costs to cover recently implemented regulations for house erosion control, energy codes, and fire sprinklers.

“New regulations to protect the environment and to shore up local city finances have made it extremely difficult for home builders to build affordable homes,” analysts from John Burns Real Estate Consulting told CNBC. Of course, if a sprinkler prevents a fire from doing more than minimal damage when a faulty wire shorts out, it will be worth every penny.

Do Your Research

Building a home can be very costly, so it’s best to understand all the factors that go into the equation before moving forward.

Just as importantly, research the builder you choose to confirm that the company is reputable and backs its work with a warranty.

And don’t forget to hire an attorney to review the terms and conditions of the construction agreement before signing on the dotted line to start the project and purchase the home.