# Spec Homes

12 Replies

I am a general contractor looking to build a spec home. I have looked at a lot of homes to fix and flip but there is just not the margin that I would need to make it work due to the current market in my area. After talking to a number of realtors they have recommended building spec homes. The construction of the home and financing are no issues with me. My questions are: How much margin, after I pay myself to build the house should I expect or require to make it work? I'm looking at a single level, modest home marketing to the retirement age community in the \$180,000 to \$220,000 range.  For those of you who have done this before how did you come up with a highly marketable home plan? Any other advice from those who have done this before?

Here's the math. It's not that different than a rehab, only with a larger construction component.

I recommend never do a spec house in an area that is selling for less than \$220 per square foot. It's hard to make the numbers work.

The land has to cost you less than \$20 per square foot of finished product. So if the land is 3000 SF, and the footprint of the house is 1200 SF, then the land has to cost 1200/3000*20 = \$8 per SF or less.

Hard construction costs should be \$95 per SF or less. In your climate you'll be building full basements. Don't forget the servicing costs for 6 utilities (gas, electric, water, sewer, phone, cable). If your city has impact fees for new construction, you need to include those.

You want to make \$40-\$50 per SF in profit.

Here's an example budget for a 1500 SF home with unfinished basement (not included):

Land: \$24,000

Soft Costs (Architect, Engineering, permits, property taxes, insurance, loan interest)  \$50,000

Hard Construction: 1,500 * \$95 + 750 * \$65 (basement) = \$192,000

Sale Price: \$330,000

Transaction Costs: \$30,000

Net Profit: \$58,000 (just under \$40 per SF)

I wouldn't do any spec building in the "modest home price market", you have too much competition from the production builders like Pulte, KB Homes, etc that have enormous buying power and can sell and make money for less than you can build for... Our initial strategy was spec building, but have made two tweaks.  We were buying land and marketing a "to be built home".  That worked out really well, our competitive advantage is that we have a "live in model home" at the price point, and in the area we are working... Going forward we have slowed down on the land acquisition side and have started to target realtor with vacant land listings and bringing them our build package, with images etc and selling up front.  We have executed that and have much less risk.  I agree with Victor, \$50/sf would be the bottom end of profit you would want based on 3000sf minimum

@Miller Josh  The truth is, unless the advice is coming from someone in your specific market, you are taking a big risk if you rely on anything any of us tell you regarding costs. Every state, city, etc. has their own unique set of challenges that must be dealt with, which can create big fluctuations in the costs to build. Here's a few questions to get started.

What size home will you build? What are all the permit costs (building, schools, traffic, etc.)? Is the land on a developed street, with utilities to the property? What will be required to get the lot ready to build? What are comps in the neighborhood? What size homes are there nearby and what types of finishes do they have? What is your competition? (as mentioned above, competing with national builders is very difficult)

What is the local economy like? What is the real estate market like? Are there a lot of homes on the market in the price range you would be in, or few? (though until you figure up all the costs involved, you won't know a price for certain) What is the rental market like? (Are homes and apartments being rented for high prices or very affordable)

Before deciding to build spec homes, you need to understand your local market and economy. You have to have a good idea that there is a demand for your product,

Those number are going to be different in different areas.

My land costs \$50-55 per square foot of finished house. While we are at \$210 per foot sales price, other areas around here are well under \$150 per foot. Construction costs can vary heavily based on what finishes you are putting in the house and the design of the home, ie: it's far cheaper to build up than out. We hover in the \$100-110 range on our homes. Also my soft costs rarely hit \$20k.

In the \$180-220k range, I suspect your margins will be much lower than in the upper ranges. I build in the upper \$300k to low \$400k (1800-2k') and get 13-18% profit margin. I know builders that are happy with getting 5%, it's all market driven though....

Thanks for the input! I would build a slab on grade with in floor heat as those are very popular with our older people. When your are figuring your net profit....Is that total net profit as I would be the contractor and the investor or should I make the net profit listed above after I pay my construction business not only costs but also an appropriate profit?

at 5% i wouldnt even go through the headache lol.

I have been building spec homes in oklahoma for years. I buy the lot, am the general contractor, try not to physically do much of the work. I like to make 10-15%. That is enough for a part time job, pays the overhead and a good profit. \$20-30,000 for a part time job works for Me. some jobs just don't work out that good, but we probably average 10%.

Originally posted by @Victor Menasce :
I recommend never do a spec house in an area that is selling for less than \$220 per square foot. It's hard to make the numbers work.

...

The land has to cost you less than \$20 per square foot of finished product.

...

Hard construction costs should be \$95 per SF or less.

...

You want to make \$40-\$50 per SF in profit.

...

While these may all be rules of thumb in your area, they're hardly good rules of thumb everywhere...

I've sold spec houses for less than \$100/sf and made a great return.

I'm helping a friend with a project in California where he's paying close to \$100/sf for the land -- and while he's keeping the property for himself, he'd make a killing if he resold it as a spec house.

I recently finished a build where I spent about \$110/sf and the returns will be great.  The California project will likely have costs at about \$250/sf, and again, the profit potential would be huge if my friend wanted to sell it.

I've made \$25/sf on some specs and the returns have been around 50% annualized.  I'd do those deals all day.

So, again, I'm not saying these aren't good rules in your area (I don't know Chicago very well), but I've done builds in a few different states, and those aren't rules of thumb I'd use...

Originally posted by @Miller Josh :

Thanks for the input! I would build a slab on grade with in floor heat as those are very popular with our older people. When your are figuring your net profit....Is that total net profit as I would be the contractor and the investor or should I make the net profit listed above after I pay my construction business not only costs but also an appropriate profit?

I don't do anything unless I make 20% cash on cash per month or less than 10k whichever is greater, my jobs are usually less than 30 days, and clients pay me within 30 days. That's just me, that's what I think my contracting business is worth. I keep my figures set in a way where if I were to outsource everything, I could still afford it. I'm working on my first build for next year, I will be keeping it, like @J Scott said, CA makes a killing. I figured my 450-500k cost will sell at 800-850k, who knows how much the appreciation will be. The setting is in San Diego where my land cost is 150k for 13,000 sf. I have seen land to cost at 150k/acre or 400k/acre, the rules of price here in CA doesn't exist. Look at the bigger picture first then trickle down to details.

Originally posted by @Miller Josh :

I am a general contractor looking to build a spec home. I have looked at a lot of homes to fix and flip but there is just not the margin that I would need to make it work due to the current market in my area. After talking to a number of realtors they have recommended building spec homes. The construction of the home and financing are no issues with me. My questions are: How much margin, after I pay myself to build the house should I expect or require to make it work? I'm looking at a single level, modest home marketing to the retirement age community in the \$180,000 to \$220,000 range.  For those of you who have done this before how did you come up with a highly marketable home plan? Any other advice from those who have done this before?

I wouldn't be concerned with what other people look for in margins/profit, I'd be concerned with what your actual profit would be and if that's worth your time....some people have no problem doing this to make say 40k while others wouldn't waste their time - its very subjective.

has anyone tried this in the orlando area..Osceola county? Looking to get started building spec homes...what is the process..please help thanks

Hi, I'm new to spec building I have questions on trying to figure out what kind of returns I should expect also what should I pay for the lot?

We are looking to build a 3200sqft home 2400 heated I have a builder ready to go that will build for \$79 per sqft turn key. homes in that area are averaging \$125sqft sell price. My bank has approved me for 100% finance for the build cost for a one year interest only loan prime + 1.75% I will have to purchase the lot cash listed at 49k my relater feels we can pick it up for 45k.

Again new to spec building any advice would be greatly appreciated. so the question is I would like to make a least 15%-18% return and what would I need to pay for the lot to make the numbers work. thank you!

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