Driving down a highway in Austin and you see a billboard that says new construction homes starting in the $500,000s or $1,000,000s, you get excited and you go into the model home, and then you quickly learn that that house is way more expensive.
In this video, I’m going to break down what the real cost of new construction homes are and how you can plan and budget ahead. So a lot of the advertisements that you see of homes starting at this price is only reflecting the base price of the floor plan or the house itself. But there are two other big expenses that go along with building a home. And this is for communities where you get to pick your own lot, pick your own floor plan and pick designs.
So the first expense that you have is your lot premium. And this varies in every neighborhood. There could be some more affordable homes that have lot premiums that are ,000 or ,000. There are luxury communities where a lot premium could be $150,000 or more. The lot premium basically is assigned to lots or pieces of land that are more attractive than others. So if you want the corner lot that has the bigger backyard and no neighbors on one side, that’s going to be more attractive and more costly to live there than to have the one that’s in the middle surrounded with homes on all sides. So anything that has a park behind it, privacy of view, or whatever will be more expensive. But in my personal opinion, this is one of the most crucial things you can pick out because you can never change it. You can never pick up your house and then relocate it on a different piece of land. So making sure that you love, the lot that you’re buying in the location of your house is step number one.
Step two is then picking out the floor plan that you love. So the number of bedrooms, so on. That’s what the builders have advertised. And of course, that’s going to be the biggest expense here. So pick the floor plan that you love to go on the lot that you love. Now, the last part that can get costly are upgrades. And there’s two main parts. One is structural upgrades, those are things that you do to alter the floor plan. So it could be that you have a four bedroom home that you love, but they have the option to add a big media room on the top floor. If that’s something that you love, then definitely add it because it will be a nightmare to try to build that on later. Anything that you do structurally, that alters the plan like vaulting the ceiling, or adding an extra powder bath, getting rid of a bathtub making a huge walk in shower. All of those are structural, and they have to get picked up front. Because as soon as you go under contract the builder sins in all the designs and permits to get the house permitted ready to build.
Now the final thing you’re going to pick out is what I think is more fun. And that’s the cosmetic upgrades to your home. So you’ll usually go into a design center. And there you can pick out everything from your flooring, to your paint, colors, cabinets, countertops, all kinds of stuff all the way down to the little knobs on your cabinets. So in the Design Center, just as a rule of thumb, expect to spend about 10% of your base floor plan price. So if the house you love is $500,000, you might spend up to $50,000 or so on upgrades, including both structural and design, that’s just kind of an average. If you want to be more conservative than go lower than that, you can still get an attractive home without going crazy at the design room. A lot of builders have what they call their base or standard package. So it might have square tiles on the floor. And those come for free with the base price of the home. But if you want the more attractive wood tiles, hardwood floors or something special, you’re going to pay a little bit more. Now if this is your dream home and you plan on living here forever, then it might be okay to splurge a little more and really get the things that you like inside. But just know that if you had to sell your home immediately, it could put you in a bad position because you might be the most expensive home compared to the others just like it in that neighborhood. And also even though your designs are great, and you have great taste, not all buyers that have the same taste as you so spending a ton of money on the cosmetics may or may not benefit you in the short term. So are there any ways to discount these prices? Well, yes, builders are not going to negotiate this the base price or the floor plan. It goes against all of their policies and this is with all of the different builders that we’ve worked with. Whatever they have advertised for that floor plan is what they sell it out to all consumers coming in. They would have big problems if they sold that home to many neighbors but then discounted it to one or two. So they never discount the base price of the plan. But they will provide incentives usually at the design center.
Let’s give you an example. We just sold a Pulte home this week. The base price was $400,000. My buyer spent about $45,000 on structural and cosmetic upgrades, and the builder paid 50% back to her as a credit at closing so she got the upgrades basically for half off. On top of that, they will often give lender incentives. So if you work with the builder’s preferred lender, they may chip in 1%, 2% or more towards your closing costs to also cut down your expenses or to possibly let you buy your interest rate down. So when you’re building from scratch, don’t expect price negotiation off the base price, but ask for some incentives, some rebates, discounts, credits at closing, and so on. New construction can be fun to pick, but just make sure that you understand what you’re getting into if your top budget is $500,000 then you should probably be looking at ads that say starting in the $400,000’s because that gives you room to add on your upgrades and lot so you feel comfortable with the ultimate price and package that you’re getting for your new home. Â
