Spec Homes

[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?  

[Victor Menasce]

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)