Building Costs

[Terrel L. Shields]

A friend and I discussed this a few days ago, and it was brought up again in another post. But here is one thing I have a problem with from folks in the high dollar regions of the nation.

Someone said that the "cost" to build a house was some $300/SF. And yes, certainly, Bill Gates home cost a multiple of that. But for the average house building costs regional multipliers are based upon the national average plus or minus the local factor. So in some parts of fly over America building costs are 80-90% of the national average whereas on the coasts, Alaska, Hawaii, etc. building multipliers rarely exceed 130% of the national average. So the question is, if the national average cost is $120 or so, how can the RCN (Replacement Cost New) be more than $160/SF or so? $300? That $300 figure is NOT the RCN. It has to include things not found in the RCN. So what are they? Well, let's start off and say what RCN is NOT.

Land costs are NOT part of the RCN. That includes "view", "location", or "site". It doesn't include even the ancillary items needed to bring bare ground to a developed "site".

What is in site? Utilities, (septic, water source, electric) sidewalks, driveways, landscaping, fencing, - all these are part of the cost of building but not the RCN calculated by your cost book.

So what is outside that RCN? Soft costs. In my area, a few hundred bucks for a building permit. In some parts of the world the permits alone can run into the tens of thousands of dollars. These are part of soft costs, not the RCN. And entrepreneurial incentive and profit is another. In highly exclusive areas with land premiums, a builder or developer may have the luxury of charging a huge sum for his profit margin. But again, that is not part of RCN.

The point I am getting at is when I see someone say that the "building costs" (RCN) is north of $300 per SF and their adjustments are $240/SF, I question if this is correct. The SF adjustment is including a lot more than the GLA, it is incorporating these soft costs and/or site costs. That looks like difficult problems when those soft costs and site costs are not variables related to the change in square footage. They are pretty much the same whether the house is 2,000 SF or whether it is 3,500 SF. This means that if the ratio of those soft/site costs isn't the same between comparables, you seem destined to err in terms of making adjustments based on such large numbers. And begs the question, how do you segregate the land value, soft costs and site improvements from the GLA ?

 

[CANative]

It depends on many things. Location, availability of skilled and unskilled labor, quality (quality is a function of quantity), competition, demand, etc., etc.

Here is a snip from the CA BOE assessor's handbook. This is just for construction in easy areas and does not include all the add-ons and allowances that have to be put in separately (e.g. base cost.) If you go to the coastal areas of my territory, figure on a lot more. There are only a handful of competent builders in the general area (about 100+ miles along the coast and they're always busy. Hire a company from the larger cities like Santa Rosa, and you've got workers with a two drive there and a two hour drive back. I've seen $500/psf to $600 or so.

 

[Terrel L. Shields]

On steep mountain sides the dirt work can be half you costs but M & S isn't going to figure that in either. But I am referring in general to middle of the road construction. I mean not too long ago, I saw a local appraisal which had RCN at $50/SF.... costs from maybe 1990 or so. allowing only 10% depreciation in a 50 year old remodel, the CA was going to come out a huge number higher so she simply dropped the RCN down... and her SF adjustment was (drum roll please) $50/SF

 

[Joe Flacco]

Some soft costs are related to the site and some are related to the improvement. It is not only hard costs that go into RCN. For example Architecht fees go into RCN while impact fees is reflected in the site. Site without impact fees, etc = land value.

The reason for the cost difference is materials have a large range in prices for even basic construction.



Look at this pricing difference between 3.25" baseboards and 5.25" baseboards. These are probably often found in the same quality rating. Every construction material has huge range or what is basically similar stuff. These little details change pricing significantly. A baseboard is not just a baseboard. A tile is not just a tile. Hardwood is not just hardwood. Everything building component has a huge range.

 

[Joe Flacco]

Composite or shingle roofing material has a huge range by itself. Then you go to higher quality materials like tile or slate and it is a huge leap higher. And then the price range for tile and slate is huge too.

Kitchen and bathroom materials has a huge range for basic quality. At the higher end of basic quality you might have Kohler brushed nickel faucets for $500 and at the lower end of basic quality you might have Moen faucet in Chrome for $150. Then you go ho higher quality brands and materials like Waterworks or Rohl and at teh low end you are paying $1,000-$2,000 for a chrome finished faucet and $3,000-$4,000 for the same faucet finished in gold. Probably like 10 different finish materials with different pricing in between for the same faucet.

Every single building material has a very large price range. Probably everything even down to nails.

 

[George Hatch]

On steep mountain sides the dirt work can be half you costs but M & S isn't going to figure that in either. But I am referring in general to middle of the road construction. I mean not too long ago, I saw a local appraisal which had RCN at $50/SF.... costs from maybe 1990 or so. allowing only 10% depreciation in a 50 year old remodel, the CA was going to come out a huge number higher so she simply dropped the RCN down... and her SF adjustment was (drum roll please) $50/SF

In terms of overall costs any additional topography-related costs generally come straight off the top of the site acquisition prices.

As far as someone not actually developing their cost figures that's an operator error just the same as doing land-value-by-I-backed-into-it. That being the dominant form of site value analysis I see among appraisers doing SFR appraisals - which include CGs who do differently when it's not an SFR.

 

[Terrel L. Shields]

Every single building material has a very large price range.

The cost approach relies upon replacement of something of equal utility, individual material selection suggests Reproduction Cost New which could be done but then functional obsolescences would be more difficult to estimate. In a subdivision you can confirm your costs by extraction of the new sales. But, of course, you must address an accurate land/site value first.

 

[Joe Flacco]

The cost approach relies upon replacement of something of equal utility, individual material selection suggests Reproduction Cost New which could be done but then functional obsolescences would be more difficult to estimate. In a subdivision you can confirm your costs by extraction of the new sales. But, of course, you must address an accurate land/site value first.

Yup.

So for example,

1) Those houses with $100-$300 Faucets and 3" wood baseboards might be in the Q4 quality construction range at $100 per SF.
2) Those houses with $500 faucets and 5" baseboards might be in the Q3 quality construction range at $175 per SF.
3) Those houses with slate/tile roofs, and $1,000-$5,000 faucets might be in the Q2 quality construction range at $250-$500 per SF.
4) Then there are houses where people source their own materials like find some special trees to hand cut and finish into floors and cabinets and stuff. Have other components custom made to build very unique structures. That would be something like Q1 quality construction and reproduction cost for something like that could be can be anything.

Reproduction cost is exact materials. Replacement cost is something similar. You are not getting something similar to $250-$500 per SF constuction for $100 per SF. You are not getting something similar to $175 per SF construction for $100 per SF.

 

[Joe Flacco]

9 foot ceilings to 10 foot ceilings on each level, that would be 10% more exterior material cost.
Vinyl vs hardie is 50% more exterior material cost.
2x4 to 2x6 its 25% more cost for outer wall lumber and then need 50% more cost for insulation.
You go from vinyl windows to basic wood windows that is like 50% more cost for windows.
hollow core doors to basic wood doors is like 500% more cost for interior doors.
You go from 50 electrical outlets/switches/etc to 80 that is like 50% more cost.

The list goes on and on.

The utility of the 2x6 construction with 10 foot ceilings, hardie exterior, wood windows, basic solid interior doors, and 80 outlets is not the same as the 2x4 construction with vinyl exterior, vinyl windows, hollow core doors, and 50 outlets/switches/etc. This is not a reproduction cost vs replacement cost issue.