“How much do your homes cost per square foot?” is a question builders hear nearly every day, and one they will never stop dreading. So when Colorado-based builder Andy Stauffer posted a blog on BUILDER’s website in early 2016 titled “The Square Foot Pricing Mystery,” he broke open a big conversation.
The article, which has amassed more shares and comments than any other post on the site in recent years, offers a valuable snapshot of how builders handle an issue that rarely gets talked about publicly. How to tell buyers exactly how much their homes will cost per square foot—or, even more maddeningly, why they’re worth that much—is an elusive holy grail for virtually every builder in North America. BUILDER readers have strong opinions about it, including how to handle the question itself.
One camp sees valuable marketing potential in not even attempting to answer price-per-square-foot inquiries but instead using the opportunity to promote their firm’s strengths and the value of their homes. “I actually love this question,” one commenter wrote. “It gives me an opening to discuss the proposed home and what they want and what I can do for them. Once I explain all of the variables, I sell them on me, not the house.”
Stauffer answers the cost-per-square-foot question with a question: “Well, that depends, what do you mean by square foot?” He says it’s a great conversation starter toward answering the real question behind the question: “How much will my house cost?”
Another camp thinks avoidance is sketchy, kind of like ghosting. “If I were a builder, I would make it my goal to never lose a client because they are unsure of my costs,” one reader wrote. “I would also develop methods to accurately predict the costs and take business away from every builder who is satisfied with calling the client stupid and telling them, ‘It depends.’”
Neither camp is right or wrong. Staying on top of costs is imperative, and using any and all opportunities to put your firm’s best foot forward is smart.
The Elusive Square Foot
Although buyers will always be able to find online price estimators and calculators offering wildly different degrees of accuracy (but nevertheless setting expectations and standards), no one has solved the cost-per-square-foot mystery.
“In residential construction,” Stauffer posits, “there is simply no agreed-upon standard for what constitutes a square foot” because every builder is left to decide for themselves. Does a square foot include finished square footage only? Unfinished basements? Garages and decks?
Homeadvisor.com, a site that connects home-improvement clients with contractors, states that the average cost to build a new house in the U.S. is $285,401, meaning a 2,000-square-foot home would cost about $150 per square foot. That’s pretty straightforward, until you consider “all the costly variables involved,” which the site says can bloat the price range of a 2,000-square-foot house to $422,025.
To calculate a home’s square footage, Homeadvisor.com advises counting “finished” spaces, or those that are heated and cooled in the same way as the rest of the house. But finished basements, the site says, have their own set of rules—“and even those can be subjective when calculating square footage.”
When it comes to square-footage algorithms, “there’s no industry standard, so to speak, and no agency that creates that standard,” says Manny Schatz, principal of Professional Builder Services, a marketing and sales consulting firm for builders in Danville, Calif. (For a look at Zillow's influence on the pricing debate, click on How Accurate Are Online Pricing Calculators?)
Jeff Prager, former University of Colorado economics professor, and co-founder of Centennial, Colo.–based Cash Flow Engineering and Backroom Management Services, spends most of his consulting hours with developers and builders talking about square footage and pricing.
“No two builders estimate the same way,” he says. “Therefore, there’s no standard.”
“Kind of amazing, isn’t it?” asks Kevin Casey, founder and principal of New Avenue, a national network of independent architects and contractors that also provides management software for design–build projects. Casey says his company tries to resist talking about projects in terms of square footage, but that’s not always possible because “people like square foot—it’s something really simple that they can get.”
Casey says the dreaded square-foot question is a major reason builders get a bad rap for not returning phone calls. “People call them up and say, ‘Hey, I’m looking at my Pinterest page, and I want this Carrara marble and these high-end appliances, and I read that can be done for $200 per square foot,’” Casey says. “The contractors know they can't deliver for that price and they won’t have a happy client, so they find a way to avoid wasting their time pursuing the job.”
Funny thing is, contractors can be just as attached to square footage when they price out projects. As cumbersome and inefficient as it may be, square footage is one of the most widely used measurements in home building—and that affects costs, of course. “On one hand, builders like smaller square footage because that lowers costs,” Schatz says, “but on the other hand, they can hopefully charge a bit more for higher square footage based on dollars per square foot.”
Beyond Sticks and Bricks
Buyers pay for a lot of new-home features that have nothing to do with square footage: a good school district, a nice neighborhood, a view, a floor plan, a feeling, a lifestyle. Everything from the home’s location to the flow of the interior spaces makes a difference.
“When you walk a 2,000-square-foot home with 8-foot ceilings, it feels a heck of a lot different than a 2,000-square-foot home with 10-foot ceilings,” Schatz says. “There’s a whole different value there that dollars per square foot doesn’t take into consideration.”
S. Robert August, founder and president of North Star Synergies, a Denver-based executive business development strategy firm for the real estate industry, agrees. “It’s not just about sticks and bricks,” he says. “Every time you can add an attribute to the checklist, you can charge more money. Schools are extremely important, and a house of worship might make a difference, and then there’s whatever the cultural environment brings: ballet lessons, music teachers. You have to quantify all these things.”
In a post on New Avenue’s website explaining the finer points of square-foot pricing, Casey says people have been saying that houses can be built for $200 per square foot as a general rule of thumb for years. “They think that if a 3,000-square-foot house costs $600,000 to build, then a 500-square-foot remodel or guest house should cost 500 square feet x $200 per square foot = $100,000,” Casey writes. “But this just isn’t true.”
Economies of scale naturally make smaller homes more expensive to build per square foot, Casey points out, so $200 is almost impossible to hit with a home smaller than 2,500 square feet. “Also, when a builder says they can build a house for $100 per square foot, they are talking about the costs to build in a subdivision,” Casey states. “They are not factoring in design, engineering, or permitting costs. They are not factoring in quality construction you’d expect in almost any coastal or metropolitan area.”
Regulatory Fees
When Natalia Siniavskaia, NAHB associate vice president for housing policy research, compared median prices per square foot for housing starts across the country in 2016, she found the average cost per square foot to build a house in the U.S. (excluding improved lot values, which vary tremendously) to be $95. Square foot prices for new construction follow a geographic pattern, trending higher in areas where land is more expensive, Siniavskaia found. The cost of building a spec home ranges from $81 per square foot in East, South, and Central states to $150 per square foot in New England.
In this case, the explanation is not complicated. “The biggest factor that drives this variation is regulatory costs,” Siniavskaia says, citing a 2012 Duncan Associates survey of 271 jurisdictions that found per-house impact fees ranging from $876 in Missouri to $31,014 in California, the only deep red state on a map that color codes impact fees from green (low) to red (high). “No other state is like that,” she says. Oregon is a distant second, with fees of $15,550—roughly half that of its neighbor. Click here for a breakdown of the states with the highest and lowest home prices per square foot.
Another NAHB study found that government regulations account for 24.3% of the final price of new single-family homes nationwide, and they’ve risen 29.8% in the past year, from an average of $65,224 to $84,671—more than twice as fast as the 14.4% that disposable income per capita rose during the same period.
For builders determined to help buyers understand all that goes into cost per square foot, the impact of impact fees is part of a bigger conversation about increasing regulatory, land, labor, and material costs that are pushing home prices ever higher.
“It’s useful to give buyers the lay of the land, let them know where we are in the macro cycle—that inventory is tight and they’re not going to get what they want because builders have a lot of traffic,” says NAHB chief economist Robert Dietz. “Builders need to stay informed and have those macro numbers at their fingertips in case they get into a conversation with a buyer who can’t understand why the numbers are going up. You need to have data sources so you can have a productive, intelligent conversation with someone who is, frankly, receiving some bad news.”
As scarcity in lot inventory and rising labor and material costs push more builders toward higher-end homes, affordability has become a major problem nationwide, Dietz adds. NAHB’s data suggests that entry-level “starter” homes, which historically make up 30% of new housing starts, now account for less than 20%, causing a blockage at the very bottom of the pipeline that will live on for decades in the form of a shrunken move-up pool.
That’s exactly what’s happening in Denver, says Noel West Lane III, president of Denver-based consulting and building firm Integrated Building Co., who adds that as a result of skyrocketing land, labor, and material costs, entry-level housing no longer exists. “The people who would buy entry-level won’t gain the benefit of appreciation to move up to second, third, and fourth homes,” he notes. “We have just made sure our food chain ends.”
True Worth
Prager has a relatively simple solution for builders looking to answer the square foot pricing question. Ultimately, builders need to convey their value proposition, a marketing statement that summarizes why buyers should choose a builder’s homes and what sets that builder apart from competitors (including existing inventory). Builders can use the statement as a tagline of sorts on which to base all communications about the company and its products. To parlay the square foot question into a payoff, sales consultants say, a value proposition is crucial.
“Builders absolutely must find or create, as part of their strategy, a way to differentiate their business from all other builders that claim to do the same thing,” Bobby Tsui wrote on a blog for Inbound Mill, a Los Angeles–based company that helps builders and remodelers take their sales process online. “This isn’t necessarily a new concept, but it’s one of the hardest to get businesses to actually do. Everyone wants to think what they do is so unique.”
To prove how generic builders’ marketing can be, Tsui suggests they cut and paste the first paragraph of their top five competitors’ websites, cross out all names, and pass the document around the office for people to compare. “Chances are, the descriptions will be nearly impossible to tell apart,” he states.
In one last chicken-egg entanglement, Stauffer says things like value propositions may be what’s driving buyers toward the price-per-square-foot question in the first place and the reason that, “despite our wishes,” the inquiry is here to stay.
“Perfectly reasonable folks will continue to seek a way to traverse a sea of information, advertising, and sales propositions, and find a simple, quantifiable unit of measurement,” he says. “That’s fair enough.”
