Spec Home Construction (Starter Homes) - Margins?

Question

Does anybody have any insight on there current margins for starter home specs? In my local market (SE Michigan) construction costs have gone up but home prices have fallen. Just wondering if this seems to be the case in most areas or just around me.

Marcus Clouse · Answer

I know its an older post but ill put my $.02 in. I build in texas and know exactly what you mean in 2022.Around here everything is selling within a certain price range $320k and under. On a new build $275k is the sweet spot but if you go up to like $320 it better have a steep roof 9ft ceilings and curb appeal front or it will sit up to 90 days before selling.Its basically what most people can afford around here.

Leilah Davis · Answer

Every market is different, man. You can't possibly posit what makes sense to do or not do in one area of the country based solely on data from your market. That's real estate 101. NOTHING is selling in my market right now. Even commercial construction has slowed wayyyyy down. We have a relationship with a much larger developer who does multifamily, mostly apartments, and even they can't figure out where to put their money right now, because the math just aint mathing for them to build or renovate at the moment. In the SFH arena inventory build-up is massive from over a year of the real estate market being stagnant, and there is hidden inventory as well from developers who took their properties off the market and are just waiting until things turn around. It's a long road ahead for my market. We're currently shifting gears to custom and semi-custom homes.

Robert Ellis · Answer

build multifamily not single family or build smaller smaller homes aren't sitting. there are thousands selling in our market in columbus

Leilah Davis · Answer

Yep. We built 6 homes between 2020 and 2022 that all sold quickly (under 2 weeks) and all sold for asking price or above. Our profit margins were great, at around 25% per house. Then in fall of 2022 we had 2 properties on the market when interest rates went up. They both took a month to sell, sold for WAY below initial asking price (we had to price-reduce, which we had never had to do before). We made 9.5% on one of those deals and 12% on the other. Oof.

We immediately shut it down and stopped building and it hasn't seemed to have gotten better since. We've been twiddling our thumbs waiting for the right time to get back in. Construction costs have continued to increase during this whole time frame. Even though subcontractors are getting desperate and seemingly really need the work, they aren't lowering their prices, they're just increasing them. Home prices, surprisingly, haven't fallen THAT much. Yes, they fell, but not an insane amount.

The bigger issue is just that the market is stagnant. It's certainly not this way everywhere, but it my city it's a very different scene than what I was used to. Average days on market in my city is like 50, whereas it was under 30 days all through Covid, with the lowest being just 6 DAYS in spring of 2022. Absolutely wild. We got spoiled by that market. At the moment things look pretty similar to what they had looked like for almost a decade pre-covid. And yes, as long as construction prices keep increasing while home prices drop or stay steady, it does not make sense to build spec.

Robert Ellis · Answer

New construction in columbus averages $219 per square foot we build sub $160 with garage on single family starter homes. Only thing investors have to control is the cost of land.