I have never built or developed a single family home, but I have always been curious to know that it costs (roughly) to build one from the ground up. After doing some serious Google-ing, I found that I was not the only one out there with this question.
The beauty of the internet is that it makes accessing information incredibly easy, however, the quality of the information can often times be incredibly suspect. I came across a post on the wonderful website, Everyblock, that has people throwing out all sorts of numbers. Some said you are looking at $225/ft minimum, others said it should be easily done for $150/ft, while others said to get any sort of quality you will be in the $300/ft range. This wasn’t surprising as you can literally pay as much as you want when building a home (gold plated toilet? Sure, I deserve it). As my late grandfather used to say, “How long is a piece of string” (answer: as long as you want it to be). BUT, what I was curious to know was, how much does it cost to build a “typical” home in a neighborhood my wife and I are contemplating moving to.
To back up a moment, the title of this post is a bit misleading as my analysis only looks at homes in a small, ~0.5 mile radius pocket on the north side of the city in the North Center / Lincoln Square neighborhoods that we are particularly interested in. There is a lot of new homes being built in this area, which means there is a trove of available data as well. Additionally, it is much more relevant to look at what a house costs to build when you constrain your search area to a relatively small radius (especially in a densely-populated city like Chicago). This is because different neighborhoods dictate what is an appropriate level of finishes, details and features. The title of this post should probably be amended to something along the lines of “What Does it Cost to Build a SFH, Comparable to the Homes I chose for my analysis“, but I think this is still a good starting point for most people (plus, that title just doesn’t have the same cache).
Short of having an architect design me a new home and going out and getting several bids from builders, I decided the best way to approach this analysis would be to find new-construction homes that have sold in the last twelve months, and work backwards to come up with an approximate $ / ft to build. The homes I chose were all built by developers, who purchased the lot in the last year or so, tore down the existing structure, then built and sold said home. This means we know two critical data points: the price the developer paid for the land/teardown and the new-house sale price. What we do not know is how much the developer spent building the new home (this is what we are trying to figure out), and what his holding+selling costs were. With regards to the selling+holding costs, I can make an educated guess. Generally, developers will target a profit margin around 20%, so for my analysis, I consider a range from 15% – 25% profit margin. For holding costs, I made assumptions about mortgage payments(**), taxes (actual) and selling costs (I assumed 7%, which is comprised of commissions, transfer taxes, lawyers, etc).
Let’s get to it. Here are the summary results of my analysis.
(Please note: Above is just a summary – Here is the full analysis with much more detail for those who are interested)
From the above, we see a range of $101 – $129 per square foot to build, assuming a 15% – 25% target profit margin to the developer. Please remember, this is what it would approximately cost a developer to build these homes. Developers do this for a living, and thus enjoy several advantages to Average Joe Homebuyer/builder. Economies of scale, increased efficiency, not having to pay an external GC, etc all lead to significant savings for the developer. To make these figures applicable to the average person looking to build a home, we need to gross them up a bit. A typical GC fee will be 20% of the cost to build the home. Let’s add another 10% to that to take into account the economies of scale and other efficiencies. When adjust for these, we get the following range:
Based on this, my conclusion is that it is reasonable for a potential homebuyer to expect to pay somewhere in the $150 – $175 per square foot range for a newly-built house in this area. Of course, you could spend significantly more than this if you wanted, but you should not have to spend much more to get what is of comparable quality for the area. Also, keep in mind that this doesn’t include the cost of the land. Lots in this area sell for anywhere from $450-$550k. This suggests the total cost (not including holding/mortgage costs) to build a 4,200 square foot home would cost somewhere around $1.10mm – $1.30mm, which is in line with what homes are selling for in the area.
I hope this post was helpful – please comment below if you have any questions or have anything to add. Would love to hear from people who have built their own home and could share what their cost was.
Also, here are links to the listings of the homes I reference above in my analysis (there are live at the time of posting, but may not be in the future):
2148 W Pensacola – $1,050,000
2440 W Hutchinson – $1,100,000
2149 W Berteau – $1,265,000
2137 W Warner – $1,312,000
1847 W Berteau – $1,325,000
1916 W Cuyler – $1,355,000
2133 W Belle Plaine – $1,369,500
4120 N Claremont – $1,370,000
2144 W Warner – $1,375,000
4120 N Leavitt – $1,399,000
4344 N Bell – $1,732,900
**To avoid a circularity, I assumed $30,000 for the initial mortgage cost to come up with a “cost-to-build” figure (since I am working backwards, I need to know all expenses the developer incurs in order to calculate a “cost-to-build” amount. This means I need to know how much the developer paid in mortgage to be able to make an assumption about what their “total investment” is, which, in turn, let’s us calculate their mortgage payment, which determines total investment, which…see the infinite loop you end up in?). I then added that cost-to-build to the land cost, to come up with a total investment amount, which I then used to calculate a more accurate mortgage payment based on a 3.5% interest rate, 30 year amortization. I also took into account the amount of time the investment was held.