Where Is All That Real Estate Housing Cost Going
Dec 1st, 2008 by Bill Clamore
Many individuals are wondering where is the real estate housing cost go when a contractor is building a home for you. In the real estate housing market, there are thousands of homes being built every day and thousands of contractors working on those homes.
Individuals who obtain a contractor to build a new house for them quickly find that building a new home can be very expensive. So where does all of the money that you are paying to the contractor go? It is used for a number of items that cost a great deal of money and are an integral part of building a new home.
One of the items that answers the question “where is the real estate housing cost go” is the materials used to build the home. Many individuals do not realize that every piece of wood, wire, or metal that goes into building the new home must be purchased. Every nail holding the home together has a price tag and considering the amount of nail needed to hold a home together, the balance of the bill can become very high.
When creating real estate housing, there are a great deal of materials to purchase and none of them come cheap. Individuals are also paying for all of the cosmetic additions to the home that will make the home livable such as flooring, lighting, faucets, and light switches. Without these items, it would be much more difficult to feel comfortable in the new home, which is why they are added during the construction process.
Another item that individuals fail to think of when wondering “where is the real estate housing cost go” is the large number of surveys and inspections needed to ensure that the rest estate housing is being built to code and that there are no structural defects present in the home. These surveys are very beneficial to the individual purchasing the home because it allows problems to be found early, before they turn into major disasters or become very expensive to fix.
For example, if a wiring issue is found soon after the wiring is installed, it will be a simple matter to remove the wiring and reinstall it correctly. If the wiring issue is found after the home has been completed, the contractor may have to dismantle a portion of the home to repair the wiring issue, causing a portion of the home to be rebuilt at an additional cost. It is much better for any issues to be found during the routine inspections required by law for the new home building codes.
The most overlooked item when wondering “where is the real estate housing cost go” is the amount of money earmarked for landscaping after the home has been built. No one wants to move into real estate housing where the landscape looks like the aftermath of a nuclear holocaust. For this reason, many contractors place the amount of money needed for moderate landscaping into the price of building the home.
This is not to say that when you move into the home, the landscape will look like something out of Better Homes And Gardens, but you will at least have grass and perhaps a few plants to make the area seem more livable. There are many expenses that go into building real estate housing, so if you are wondering “where is the real estate housing cost go”, these items may be the answer to your question.
When my mom was a Realtor I would work with her and knew several people who were building new houses, so that gave me a good understanding to what all went into new construction.
Market is going up then down.
THats natural
Good article. This is not to say, of course, that some contractors don’t pad the bill a bit. But I guess we shouldn’t let a few rotten apples spoil the bushel.
Good post. Another big line item in the cost of building a new home that is often overlooked is profit. Many homebuyers forget that their builder is in business and to be successful at what they do they need to turn an profit on each and every home built. The same is true for every subtrade the home builder hires to work on the project – the money they take home at the end of the day after all the materials and labour have been paid for is built into the price, but it certainly is never separated out as its own line item.
Thanks for these. I was always wondering where the money went. And I thought I was spending on something I didn’t see. Thanks for the clarification.
And don’t forget all the infrastructure. That has to be paid for too. Some large communities force the builder to pay for much of the roads, schools and water connections.
I’m not sure that this is all where the cost go… for some there are other financial setups that take up much of the housing cost…
One thing people sometimes dont realize is that large builders cut costs by working on a large scale. This means if you build a house next to a new large development its hard not to lose money when you sale.
Housing is still a very expensive project. No matter what they say, there will still be a lot of hidden fees in every housing loan or house purchase transaction.
When I built my house, it took so long that I felt like I should have bought an older house. It was very affordable considering Arizona homes for sale are not cheap. In the end it was worth it though.
I used to buy real estate shells and renovate them, and I can certainly attest to the expense. It’s not cheap, and when it is, watch out, because you get what you pay for. I’ve had to go back and replace brand new work on several occasions due to untrustworthy and incompetent contractors, so make sure you get it done right the first time!
People find out exactly where the cost go when they build their own house. As a real estate agent, I often work with people that want to purchase land and build their dream home. I find that it is important to explain to them that they will end up spending double what they intend to by the time they are finished building. The sad truth is that divorce is often the result of the home building process due to the stress added to the relationship over money.
Thank you for all the clarification. I was always curious to know where all the fees and charges went. Thanks again.
Wow it really starts to mount up when you add all the costs up!
Yes, it is true that most of the money goes the way you just described but consider a bulk construction, the cost for everything becomes cheaper and cheaper. This also explains why a real estate developer may be earning 10 or more times the cost of each unit of property.
Good Information. Contractors were making really good money in the past, and were able to charge more for their services becuase home values were supposedly going up so fast. Now that that’s not the case, it’s much harder for builders.
This is a very good article first of all, and I think we all always wondered about where did all the money go? Am I being charged more? Am I paying too much for this? And thinking this is correct also. We ask here and there about how much did it cost them to build a house and how much you are paying and start comparing. But in these things we always forget that building each house may cost different prices because planning of each house is different. It can’t be same at all. And the points mentioned by you here clears all these confusions. And also we shouldn’t forget that each year is different so building house this year may be cheaper than coming years…..or might be more expensive than last year…
Thank you for writing such a good article and good luck!
Regards,
Michael McLaughlin, Cary real estate
THis is so true, just look at the COST Approach on the Appraisal. That’s whi I feel re-sale is such a bargain. Many times buyers of NEW homes do not look at ALL the costs involved. Is the price of a fence, sod, landscaping, etc. included? Those costs as well as other upgrades add significantly to the base price.
no comment guys! Always keep blogging! It is very helpful
In these days, the price of a to-be-built home can be negotiated. I have discovered that some builders are willing to cut their profit to keep their business going. The costs are many and the buyer needs to understand as much as he/she can before entering the process.
Very good and interesting post. At some point each of us have had a client ask where his money is being spent. Good reminder of things you can remind them of.
This is exactly why it’s so important to make sure you are financially stable and truly ready to build a home. It always costs more than you anticipate. Don’t jump into the deep end of the financial pool unless you have the means to swim out.
We regularly ‘locate’ plots of land so people can build their dream homes. In the Uk the cost of that land represents approximately a third of the total cost of the build. I always advise our clients that good project management is absolutely essential to keeping costs down, builders (contractors) are one of the largest expenses and to have them sitting around waiting for either materials or other contractors to finish their jobs is equivalent to burning money.
Cortney,
All valid points but something that I am trying to figure out is with lumber prices at 15 year lows on the commodity futures charts, why are builders still telling me that their cost to build is at all time highs ?
Hey Courtney, very good post!
I happen to know first hand that contractors always inflate the bills with as little as 5% but they always do it and guess what, they are getting away with it!!
All contractors are out to make a profit – if you’re hiring individual contractors, you’re not getting the wholesale rates a building company can get (And subsequently pass on, due to high volume, lower margins)
As an individual hiring contractors, you need to account for cost blowouts, and budget over runs, something that the companies account for.
In Australia, the building industry is becoming more competitive, making it a good time for renovators and builders.
Thanks for this post, it’s very useful
Great blog post. Added to favourite bookmarks. Will be checking back regularly.