How Your Home Builder Affects the Price of Your Custom Home

In recent articles, we've discussed three key elements that affect the cost to build a house: location, house plans, and features/amenities. Now it's time to talk about how the builder affects the cost of your new home.

There are two primary ways builders can affect the cost—one that is easy to measure and compare, and one that isn't.

1. Price

Price seems like a pretty simple thing, right? But if you take the same floor plan and specifications for products and materials to two different builders, you'll get a different price from each one. (That's assuming they're all using a fixed-price contract rather than a cost-plus.)

Why price difference?

Why are the prices different for the same plan and specifications? There are a few reasons.

1. -Different profit and overhead margins. Some builders simply command a higher profit margin because their services are in higher demand. Better builders make more money. "Better" to you, though, might not be "better" to someone else and vice-versa. 
2. -Efficiency. A builder might have a higher profit margin and still have a lower price due to better organization and efficiency. The more organized and efficient the builder, the less money he or she needs to charge. 
3. -Unknown or poorly calculated costs. Some builders employ the WAG method when pricing (you know, the Wild A__ Guess). Others employ a more precise estimating method that allows them to take all costs into account. Estimating the cost of a house can be complicated, and the more uncertainty a builder has, the more he's going to pad the price. As an alternative to padding the price or risking losing money because of poor estimating, a builder might offer a cost-plus contract, which shifts the burden of risk to you.

2. Overall cost of ownership

This is the one that's nearly impossible to calculate, but you can get a pretty good gut feeling for it by shopping around and asking good questions.

Will the builder honor the warranty?

Sometimes a small builder will give you a good price up front because he's desperate for a deal, but it leaves you with the expense of fixing his (initially hidden) mistakes and cut corners.

Is the house "tight"?

Sometimes a builder with poor quality controls will leave a house with poorly done insulation, caulking, and other hidden issues that cost money every month in the form of higher utility bills.

Resale value.

A house that's a bargain when new is likely to be a bargain to the next buyer as well. Don't expect to get a good deal when buying and then get a premium price when selling. Whatever it is that made the house cheaper when you bought it probably didn't go away while you were living there.

Take time selecting your builder, and make sure you ask lots of questions up front. If a builder dodges those questions, it's time to move on to the next potential builder on the list.