Building a home in a neighborhood is often an investment that will pay off for the buyer, as well as for the builder, in the long run.
But what if the home’s construction costs are much higher than the buyer expected?
This is what we call a “build to price” situation.
That is, the house’s construction cost is significantly higher than what the buyer would be willing to pay, as the average buyer is likely to spend more on the home than the seller would.
Builders are generally required to use an estimated fair market value to estimate their cost of construction.
But fair market values are only one measure of a home’s true cost.
A more accurate method of determining a home builder’s fair market price is the cost of materials.
Building materials, including carpets, wood, and finishes, are expensive to produce and must be sourced from suppliers that have similar quality standards to the home builder.
The builder must also use materials from local suppliers that are comparable to the materials they are using.
But there are other ways a homebuilder can make a home buildable that would save the builder money in the future.
For example, a home can be constructed with a “baseline” price, which is the homebuilder’s estimate of what a buyer would pay for the home.
If the builder’s estimate is significantly lower than the original purchase price, the buyer can purchase the home at a lower price.
But if the builder has to negotiate lower prices with the buyer because of a higher build-to-price ratio, the builder may need to lower the prices they charge for materials and/or services, thereby saving the builder from having to pay more for the materials and services.
If you are considering buying a home, make sure you are aware of these potential pitfalls.