this is a bit of a double post but I realized after I posted there is not much activity in the development forum..
Does anyone have any experience with high end spec homes or high end rehabs in infill locations? If so, what are your thoughts and experience on this? Pencilling numbers, it seems that this is a better strategy than smaller houses because the margins are the same but it's simply better to have to build 1 house to make $300k vs building 3 houses to make $100k. Thoughts?
If you are one single person calling the shots, I agree it is easier to do one project. That said, you will have greater capital contribution and the price of being wrong will be higher in a concentrated bet. Generally I think fewer, bigger projects are better.
Dustin, First off, welcome to BP! We build spec houses ourselves in high end areas. The amount of time it takes to get a project through design, planning, etc. really is no different than it takes for a remodel, and in many ways it's much simpler. Buyers also like the option of buying new, and being the first buyers in a property. New construction has a lot of advantages that older homes do not.
In higher end areas the lot costs are far to high to build small houses, they won't pencil out.
What area are you looking to build in? What is the market like? Is there a strong economy? Is there competition for new houses from other builders? I would be happy to get into all the details we look at if you want more information. You can message me if you'd like.
With common margins the profits are higher, but so are the risks. Targeting a narrow portion of the market for your exits comes with heightened risk for the spec.
@Karen Margrave thanks, I have posted here a few times. I mostly do commercial real estate but was looking into spec building because we've sold a couple of complexes and have some liquidity. There are no good commercial deals available now, pretty much nationwide, caps on quality stuff is sub-5%, no where they can go but higher so stupid to buy long term stuff right now IMO. Since I'm remote, I can't do value add commercial very easily without local partners, and I'm not really a partner type of guy generally.
I was looking at Memphis because that's my home town, I know it really well and have a lot of good contacts who I feel comfortable doing arms length deals with me. I live in Dubai and the market here isn't mature enough to bet on long term and is very costly ($10m's to do any sort of project).
In Memphis, in very solid infill 80 year old neighborhoods, you can buy tear downs for about $300k (0.5 to 1 acre lots) and the sales price on new is $180-$200 once you get in the 6k+ foot range, can go up to $250 or so depending on lot. DOM is around 90-120 right now for something fairly priced, there is very little high end inventory that isn't in the suburbs (which are dying in Memphis).. The X factor of course is your build cost.. I've talked to some people and have done a few rehabs in Memphis just to get an idea of the costs, and I think realistic is circa $100 PF all in hiring a GC for the license and some consulting and subbing everything yourself (plus the lot). This is only 20% margin on a 6k house so I was a bit leery about it.. maybe my build prices are too high, because I don't see why anyone would be doing spec homes with only 20% gross margin, yet a lot are being built, so I must be missing something.
We would be building with our own cash at first so can afford to wait out any down turns. Was just mulling the idea and am glad the community is so willing to give feedback.
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