What is the math that determines how much house to build?

[David Jiang]

When building spec homes, how do you determine the size of homes to build? I'm running this exercise in my head and so far, I can imagine a pretty linear payoff within a certain size range. For example, if your total construction costs (land, soft+hard costs, etc) is $150/sqft and you can sell your house for $200/sqft, then you make $50/sqft regardless of whether you build 1500sqft or 2000sqft.

But what I have to assume is that at some point, the payoff is no longer linear and I'll begin to hit diminishing returns. So then the question is, what is the math that goes into finding the optimal building size? Would it change if you're development is surrounded by undeveloped land all around vs. in otherwise established neighborhoods?