rian johnson's "brick", which won an award at sundance, was made for $450,000 on 35mm. then it was sold to distribution companies which made all of the below costs you're talking about.
if they're shooting it on 16mm with a small crew (union or not) and their actors are working indie sag, $250,000 doesn't sound unreasonable at all for a film looking for a festival run + talking to potential distributors.
Yes, you are absolutely right. The best way to have a low budget production is to find a film and drama school in a place where there is no union. You can get a crew for next to nothing. They get screen credits which matter more than you think, and you can provide food. You can rent a cheap digital camera like Red One with lenses for about 600 Euros per day, a set of HMI lights and electricity for another 1,000 or so - clothes and props... you can make a movie for 50,000 Euro if you want (typical shooting schedule is about 20-25 days).
However, that wont bring your movie nowhere. You can seek a distributor, which get tons of proposals and probably wont even look at your film (NDAs and lots of proposals mostly). Think of distributors as VC companies and each movie as a startup, because it is. Distributor has enough money to market the film.
Another option, which almost every indie production takes is festival run. Festivals are great because if you win an award, distributor hears about you, distributor might see you there with your movie and there are usually market palces associated with festivals where distributors and TV houses shop for movies and series (I work in animation and biggest is Annecy in France).
Some of you might think, why not go viral with the movie? Why not let it go on the internet, market it around reddit, digg, whatnot - it could be a festival like cycle, no? Well, no. You see, I would be the first one to do so, but if you want your flick to be eligible for any kind of festival award (from Annecy to Sundance to Oscars) it works in a funny kind of way. In order to make your flick run in a festival, requirements to do so usually mean that it had to already run on several festivals (Oscar eligibility for example) and almost always there is a strict rule that your film is not publicly available (online or distribution), which gives festivals a sort of premiere in their region.
Movie business is a strict business with a lot of rules and even more egos. Each and every movie is run exactly like a startup that operates on milestones and further funding.
All true, but you can make those rules work for you. First, genre expectations are different. Generally you need a famous name attached to sell a movie, and you can't get one. But horror fans don't care much about actors. (Neither do sci-fi fans, but sci-fi is exponentially harder to pull off). And fortunately, horror fans like bargain-bin, formulaic movies.
There are plenty of horror and no-budget festivals, so if your film is not total crap then you have a good chance in being selected for one. That'll help you get more money from the distributor, but if you don't succeed it's not too much of a loss.
The union doesn't matter too much. The lower your production budget, the less likely they are to bother you. SAG (actors) has a very cool deal for no-budget films that lets the actors work for free or minimum wage. Writer's guild just does not care below 6 figures. Ditto for the crew and camera unions. Of course the less you have to spend the less you can get in the way of experienced people, but if you have a few enthusiastic key people who are willing to shepherd some enthusiastic amateurs, you'll be fine.
RED One is an amazing camera, but I wouldn't use it for this kind of project. It's still pricey, and says that you have money but you're not willing to spend it on the crew. For the dirt-poor filmmaker, what you want is a Panasonic HVX or similar that shoots 24/5P and which can put out or be converted to something that looks fairly decent at 720p. And a friendly producer.
If you turn in a film that does not completely suck for under $50,000, you can probably sell it for enough to get your production costs back.
if they're shooting it on 16mm with a small crew (union or not) and their actors are working indie sag, $250,000 doesn't sound unreasonable at all for a film looking for a festival run + talking to potential distributors.