One of the best kept secrets of building a place of your own is that it is mostly very easy to do, once you know how.
This post looks at some of the costs to consider when planning your build.
Cost-per-sq.ft. is not a useful way to judge value
Judging a small-house design based on the cost-per-square-foot to build is bound to be misleading if you are using ‘national average’ statistics as a comparable: smaller than ‘average’ houses, cabins and ADUs will cost more per square foot than typical single-family homes, for several reasons (in the U.S. ‘average’ is about 2800 sq.ft.).
Regardless of the size, houses all have similar fixed costs, such as permitting, design, utilities hookup, utility trenching and foundation excavation, water heater, HVAC equipment, and those costs are divided by the total square footage to calculate the cost per square foot. Smaller than average houses still require a bathroom and kitchen, which tend to be the most 'expensive' square footage in a house. Thus, smaller structures end up having a higher cost per square foot than an ‘average’ house.
Unlike an ‘average’ house, the cost per square foot isn't diluted by extra bedrooms, large living rooms, ‘bonus’ rooms, and hallways. These spaces are cheaper square footage to build and they bring down the cost per square foot of an average-sized house.
What all of this means is that the cost per square foot of a smaller-than-average house is most likely going to be higher, but you are packing a lot more value into a smaller space.
How big is the Ballpark?
Be very cautious when considering any ‘ballpark’ figure offered to you: it is an interesting quirk of human psychology that we tend to lean toward information that is more appealing. Which number to you find more appealing, $235/sq.ft. or $400/sq.ft.? Of course, the lower number is more appealing (and memorable), even if you ‘know’ that it is wildly inaccurate.
Perhaps because they don’t have the experience to know better, or perhaps because they’re more interested in selling you something than being honest, some folks quote the historical “national average” cost-per-square-foot as somehow relatable to building a smaller-than-average house. Don’t fall for it.
That number is - at best - very, very misleading when provided without context, and at worst it’s disingenuous: being a historical statistic, it was already out of date by the time it was published; as well, it includes the hundreds of thousands of 2800 square foot generic tract houses that were built that year, dozens at a time, by professional production framers using lower-end, price-discounted materials, a situation bearing just about no resemblance to the construction of the cabin or small house you’ll be building. Apples and oranges.
Why the big difference in cost?
With a production/tract house, you're going to get whatever the builder gives you. Production builders operate strictly on price, so they will cut costs wherever they can. One supervisor may run as many as 50 houses. The subs will be the lowest bidders.
In a single-built custom home, you can expect more finish choices, more attention to details, better-quality cabinets, countertops, flooring, etc. Custom-home builders will have a list of go-to subs who will produce a higher level of construction and can be trusted not to cut corners.
Every year only a few thousand ‘single-built/custom’ homes are built in the U.S. Every year 100s of thousands of production houses are built in the U.S.
Clearly, the ‘national average’ price is overwhelmingly skewed downward by big, cheap-to-build production houses. Unless you are building a 2800 sq.ft. production-grade house, the ‘national average’ cost is useless to your planning.
As of March 2022, the anecdotal reports I’m hearing from across the U.S. and Canada are that professionally built custom houses of all types are running between $350-$600+ per square foot, not the absurdly low “national average” number that I’ve seen quoted.
Factors that Affect the Cost of Building a House
- Land
The land on which the cabin or house is built is one of the most important factors affecting the overall cost of building a cabin or small home.
How far from the nearest materials supplier is it? Is it accessible by large vehicles, such as a cement truck, or a small crane for lifting heavy beams or roof trusses? Is the land you want to build on sloping or flat? Is the building site close to the municipal road, or will a long driveway need to be in place before construction begins? If the land is rocky, with a thin cover of topsoil, a full basement may require blasting rock before construction can begin. Choosing the design for your cabin or house should be guided by the land it will sit on. For example, if you insist on features that will cost a premium to implement - such as a full basement when building on bedrock - be prepared to pay more than the equivalent house built on a slab-on-grade foundation.
- Location
When it comes to real estate, it’s all about location. In rural areas, construction costs may be lower, but skilled and qualified builders may be more difficult to find. The cost of building a cabin or small house will vary depending on whether you want to build near a major city or in a rural area near a small town. It will usually cost you much more to buy land and build near a large city.
- Fees, permits, and inspection
Government regulations vary wildly - some localities have essentially no rules regulating cabin or small house construction: you are free to build whatever you want, however you want. Generally these places are also remote from cities and towns, and often have depressed local economies. Generally, the closer the proximity to developed areas (cities and towns), the greater the process of building a cabin or small house will be, adding time and cost that must be accounted for in your land search and budgeting for construction.
- Restrictive covenants
There are unique instances where houses have to use specific building materials or particular designs. This is common with protected areas or homeowner associations. These specific requirements can significantly affect the overall cost of building a cabin or small home.
- One story or two
In absolute terms, it costs more to build a two-story home than a single-story one. This is because additional items and things will be required for a two-story house, such as extra floors, scaffolding, stairs and more. However, on the basis of cost-per-square-foot of usable floor area, a multi-level building will often cost less.
- Materials used
The materials used - specifically the final finishes and the grade of windows and doors you choose - will have a significant impact on the cost of building your small home or cabin.
- Tradesperson
Even if you plan to do much of the construction yourself, you will probably need to pay for professional, skilled tradespeople for aspects of the process that you are not qualified to perform. These professionals might include designers, engineers, carpenters, plumbers, electricians, roofers, and others. The labour cost they charge will affect the overall cost of building your home.
- The house itself
Last but not least, the type and size of the house you are building matters a lot. The more square feet your house will cover, the more expensive it will be. The number of bathrooms and bedrooms will affect the cost. Will the house be a simple, generic design or something more architecturally interesting? Do you need a pool, deck, or porch?
While the list is far from complete, these factors have the most significant impact on the overall cost of building, and can influence a cost difference in the tens or even hundreds of thousands of dollars.
Selecting a Contractor
While it is entirely practical for some folks to undertake the entire construction of their cabin or small house on their own, for the vast majority this is not the case. Yes, by acting as your own general contractor you can theoretically save quite a bit of money, but in order to realize those savings, you will need the time and all the same practical skills that go into building a house as a professional builder.
So, for the vast majority of us, the next factor that has the biggest impact on the cost of building a small house or cabin is the contractor you select. The cost of hiring a builder varies from one builder to the next, often depending on the type of work the builder specializes in. Some specialize in production homes, while others do custom-build.
Before hiring a builder, it is essential that you get quotes from various builders in your area. Doing so will give you a more precise idea of how much the construction will cost and which contractor offers you the best value (note the word ‘value’: do NOT only base your choice on price. Sometimes the most expensive option is the best value. Sometimes the lowest-priced contractor is the very worst value.)
You should ask every contractor the following questions:
- Are you licensed?
- Are you insured?
- What is your building process, and why that process?
- Are you able to build a home on my property?
- Do you offer regular updates on the progress of the project?
- Do you have recently completed homes that I can inspect?
- Can you provide a few references?
Construction cost calculators
There are many cost calculators available online, and these tools are great for giving you a rough idea of how much construction will cost. It is imperative, however, to remember that these tools don’t provide an accurate quote.
Prior to using a construction cost calculator, know the assumptions each calculator makes. You also need to take the results you are given with a grain of salt.
- Getting a custom quote
For a clearer picture of how much constructing your home will cost, you need to get a quote from a builder. Builders take into account the specific requirements of your project, site requirements, layout, size, and desired features, among other things. This helps come up with a more accurate figure on how much the project will cost.
All in all, it is imperative that you get quotes from multiple builders. You also need to note what the quote includes and what extra costs may be. It is good to remember that site costs, driveways, septic systems, wells, and landscaping are often not included in the construction quote. Needless to say, they can add thousands of dollars to the total cost.
How to Finance the Construction of Your New Home
If you need to borrow money to construct your new home, you will need to get a home construction loan or a self-build mortgage. These loans can be set up in a way that allows you to buy a vacant block of land and build on it within a specified time. The loans can also be used to fund the construction if you already own a piece of land.
The construction mortgages are typically secured by the land and any improvement value. This means if you default on payments, you will lose the land and any improvements you will have made to it. Down payment will be required. This can be about 25 to 30%.
The two types of construction mortgages are:
- Completion mortgage
With this type of mortgage, the loan will not be transferred until the project is completed. This means you can make changes to the mortgage, like how much money you need. The changes can be made until 30 days before taking possession of the completed home.
- Draw or progress-draw mortgage
With this type of mortgage, the loan is offered in increments. The builder gets additional funding after passing the inspection of a set stage. The lender usually calculates the total amount of money you will need to pay the builder then allows access to it at defined times.
There are a number of requirements you have to meet before you qualify for the construction mortgage. Some lenders may restrict you to a specific builder, while others may require the project to be completed within a specified time. The majority of lenders will also require an estimate, including the cost of the land when it comes to the construction costs.
In Canada, a home equity line of credit or a home equity loan is a good option when funding a new home. First mortgages will not be offered to people looking to build their houses from the ground up. Lenders will require that you use some equity in the current home you own to ‘secure’ the mortgage for the new house.
Production Homes vs. Custom Homes
Production home builders are major companies that have systemized their home construction process. The beauty of using production home builders is that you get an extensive range of floor plans that have already been priced out and cater to a wide range of budgets from standard to luxury. The drawback is a production home has every aspect finalized before the construction work starts. You will not be able to improvise or change things up as you go.
On the other hand, custom builders are local contractors who pride themselves on personal quality and uniqueness. They are the best choice if you like the idea of having a certain level of involvement in the home-building process. While it is optional, custom builders give you the flexibility and freedom to improvise and change things up as the work is being done. Custom builders are also comfortable working with architects to create unique home plans.
Cost of Building a Kit Home
Kit homes, also known as pre-fabricated homes, are designed and built off-site, then the materials are transported to your property and assembled. The cost depends on your selected floor plan as well as the cost of finishes. Generally speaking, kit homes are more cost-effective. They also allow DIY contractors to do a lot of the work themselves.
The cost of a kit home may be affected by the following:
- The model: Logically, a 4-bedroom kit home will cost significantly more than a 1-bedroom kit home.
- The siding option: Stone, brick, vinyl, and other options available.
- The site: Sites that are hard to access or need levelling will inflate the costs.
- The package: A kit home that includes the bare shell will be cheaper than one that includes everything from air conditioning to floor coverings.
It is always good to get an itemized list of what is included in the cost of a kit home. Does the cost cover everything you need?
There are numerous factors that impact the cost of building a small home or cabin. It cannot be stressed enough: Research your options thoroughly to get an accurate idea of the total costs. Planning everything adequately and hiring the right team will guarantee that the project gets finished on time and within your budget.
