We are just about to complete our first spec home - a $650k single family ranch style home with 4 bedrooms and 3.5 baths. I always wanted to build new and despite my almost ten years of remodeling experience there were a lot of things I wished someone told me before and I would like to share. If you have missed the pop-up event two weeks ago I wanted to share a few key lessons and some pictures. 

A spec home is built on "speculation" - there is no buyer until you have a fished product. This comes with a set of pro's and con's. In many way's it is like a flip. For once not having a buyer means that the builder has to fund the entire cost land+build+overhead until the property is sold. On a conventional building the buyer provides funds for most of the construction. On the other hand not having a buyer means the investor calls all the shots. There is no weekly/daily conversation with an anxious client, who wants to change things and have everything already done yesterday. Managing a client can be a huge task over a long period of time.

As far as net net net profit on a spec (after selling cost) is probably between 8% and 15% in taxable income. From that point of view it does not even come close to buy&hold. While we have an accepted offer and are wrapping up final punch list items at this time, I will still need another month before all the invoices have cleared through book keeping and I will know what our actual profit will be.

So the story starts in May of 2017 when I bought one of the last remaining in-fill lots in a popular subdivision in one of the wealthier suburbs on the north side of Milwaukee WI.

It takes longer than you think. The plan was to have plans and permits ready by the end of the summer and break ground in August and then have the roof on before the snow flies. Underestimating the red tape was a mistake - before I could present the plans to the city from approval I had to obtain approval from the HOA and their architectural control board. The plans were supposed to be signed off by the developer of the subdivision, but they told me literally at closing that they had turned over control to the newly formed HOA a day ago. Of course the newly formed group of neighbors did not just sign off on our plans, they were keen to be deeply involved had particular ideas about how a home should look like and made me change plans several times before finally signing off in October. This is the very short version of a really long story!

Don't even try to save money on plans. Having a great architect is absolutely key. There are many plans you can buy on the internet and save a couple grand. Saving money is always great, but this is not the place. I would not have made it through the HOA process without my architect. She is also familiar not only with Wisconsin building issues, but has drawn up many plans for the local municipality and understands what they want - for example they will not accept any stone feature to terminate on an outside corner (only inside corners) - details like this are important and can easily cost you a month delay with the city approval.

So, after we finally had HOA approval I presented plan at the next monthly city meeting and was anxious to make up time and start excavating. Here is where I discovered the next issue: you can't excavate until a week before the concrete company is ready to pour the concrete footings, because you don't want your dig to turn into a muddy pond with a soft bottom. So we had to wait again for the weather and the concrete contractor. Finally by the middle of December we completed the dig and within a few days had a basement in place.

As you can see we had to cover the footings with hay to keep the frost out and allow the concrete to cure without freezing before we set the forms for the walls.

A few words about financing: we bought the lot cash and had a construction loan set up to finance the build. This is very common and of course there is a process. The bank requires plans, a detailed construction budget and an appraisal based on the plans to do that, so you need to have good paperwork, before you approach a lender. The funds are being disbursed in draws after the work is completed - in our case we had set up 3 draws. So after about one third of the construction was completed I had to provide a detailed break down of the work done, matching invoices and lien waivers from every subcontractor. The noteworthy detail here is that of course the subcontractors don't want to wait 2 or 3 months before they get paid, so you basically need about the equivalent of one draw in liquid cash on hand to get everyone paid before you can pull from your construction loan and reimburse your working capital.

Early in January the concrete had cured just before temperatures started to drop into the teens. Working in cold temperatures presents a lot of challenges and increases cost. Some days we had to shovel snow for an hour before the work could begin. Tools don't work well, lumber can not be found, because everything is under a white blanked. And some days you have rain on top of snow and then a blistering cold night leaving everything ice crusted and frozen solid... 

in remodeling you can get away without heavy equipment. While we had a telehandler on site to move lumber and help frame walls I decided to rent a big crane with an operator to help set the pre-fabricated roof trusses. It was surprisingly cheap and we had the roof set in less than a day.

Once we had a roof in place and windows were installed we could start to close up sofits and install exterior trim and siding. Two things are really important here: you need to have all your material and design choices done ahead of time. There are too many contractors on the job and any delay on material supply would be a huge waste of money and time. Working with a good contractor supply house is priceless. We could have never done this with materials from a big box store. They know what you need and how much of it. 

The sheer volume of material that is being specified, ordered, delivered, accounted for, invoiced and then paid is massive. If you are used to 50k remodeling jobs you start to realize everything is literally ten fold the amount of paper, money and time. This part is easy to under estimate - local builders will have a full time project manager for every 3 houses they build, 5 at the most!

One of the biggest myths - cost per square foot. A lot of buyers ask builder how much the cost per sqft is and then shop for "the best builder" based on that number. Even worse, some builders will quote a cost per sqft when you talk to them. The cost of a build is so variable in it's many components, using this number for decision making is flat out dangerous. For starters, the lot has a huge impact on the cost and vary greatly. Bedroom sqft's are much cheaper than kitchens and baths. Main floor is much more expensive than a second floor, because the cost of roof and basement is already paid by the main floor. This is why large ranch homes tend to be expensive.

At this part of the project my every day job was to focus on the following items, basically the same as a remodel, just in much larger volume (meaning more hours of my daily time):

- materials: uninterrupted supply of the right materials just in time when needed

- contractors: make sure the right people are on the job at the right time, discuss next steps with every one - every day

- quality control: inspect the work of every trade every day, discuss issues and follow up with corrections

- clean up: it's amazing how much garbage a job produces. keeping the job clean means higher quality and keeping it safe.

- paperwork, tons of it: orders, delivery notes, invoices, checks, payments, lien waivers etc.

About contractors: working with the right people makes all the difference. Most of our trusted remodeling guys were a great fit for new construction, but some were not. The expectations from a buyer are very high on a $650k purchase: perfection is the only acceptable level. On a flip you can get away with a few imperfections, on a luxury spec homes the expectations are similar to a brand new car. And that requires a different level of craftsmanship - all the way down to the paint job.

A lot of trades will specialize on either remodeling or new construction: like HVAC, insulation, painters etc and they don't cross lines, so you have to find new contractors who can deliver the quality and price necessary. Also, you need different trades like a concrete/foundation contractor, excavator, grader, water/sewer, surveyor, engineering company etc not commonly used for remodeling. Generally speaking while in remodeling you want contractors with general skills, for new construction the right contractors are much more professional specialists with a single focus and purpose. 

Here are pictures of the final product:

The first one is always the hardest, it was no different here. It definitely took longer than expected (8 months from closing on the lot to excavation + 9 months of construction + still 2 months to close = 19 months) and over budget (fortunately we also sold it higher than originally expected). I have a long list of ideas for things to do better, faster or different on the next one!

I hope this gave you guys a bit of a taste what it looks like and if you have any questions please fire away!