It's all relative. In Des Moines it's outrageous (although still worth it!), but in the Bay Area or similar market it's a steal. Comparable homes out here can be 2-3x.
We did our fist home at $145K for 1200 sqft and can offer than again late next year. Margins are too slim to grow at that rate, re:Tesla.
You're confusing the value of land vs the value of the structure itself.
The $1 million properties in the bay have structures on them that are worth maybe $150-200k tops, whereas the rest of the value is in land.
A high land:structure value ratio is not uncommon for the US coasts, in high demand areas (especially that have older houses, built in the 20s and 30s that will need significant renovations to be brought up to a safe living standard)
That's why it's outrageous. If you're considering paying 400k just for the structure, that means you already own a piece of land worth at least $800k where to put it. So we're talking about being a millionaire to be able to afford something like that. So let's be honest for a second and not pretend like you're not targeting the top 1-1.5% demographic here.
I noticed you're a founder for the company.
Construction is a perfectly competitive market. It shouldn't have economic profits, which means it should be paying your costs and salaries and that's it. I'm not sure what was the rationale for your getting into the business, but the modern prefabs are a dime a dozen and the thing they all get wrong is affordability. If you don't think I can go to another state and bring 4 construction workers to build the same type of structure for $200k, sourcing my own materials and paying them salary, you're just deluding yourself.
I wouldn't be surprised to learn that companies like that go bankrupt by the dozens, because they all miscalculate the economics of the market.
Most of the value is in the land, and the homes are no different than $200K homes in the midwest. However, they are worth more and cost more because of very high demand and limited supply of labor and land. Putting a standard new home on a property that just sold for $1.6M (a home that should, anywhere else cost $300K) allows you to flip that property for $3.2. That's in Redwood City in a decent, but not over the top (for the Peninsula) neighborhood. Same home in a different market is worth quite a bit more.
Bare minimum for non tract construction is about $250/sqft or 3x the rates in the middle of the country. For high performance homes, $600+ /sqft is not uncommon.
Construction is not perfectly competitive, especially here in the bay. Guys (builders/trades people) pick their rates because demand on them is so high. Regulation, permitting and crazy processes mean the barrier to entry are higher than ever before. It's not fixable with day labor and a spunky attitude.
That said, our current line is the Tesla Model S of homes, late next year we'll be able to offer our Model C range for a much broader market.
$400k for 1200 sq. ft is nuts.