First Spec

8 Replies

Please give me your opinions.

I'm working towards my first spec build. The first few are going to be hard to fund so my plan is to start small. I have purchased two vacant lots, one with cash for $19k and the other is seller financed for $21k w/ 30% down. The lot I paid cash for is a nice lot w/ a great view that I felt deserved a larger home so that is why I bought the second lot. Both lots are held in the same LLC.

I had plans drawn up on a 1500 sq ft home and got bids to build. Construction cost is going to be $130k so I will be into this project for about $100/ sqft.  Comps in the neighbor hood are all over the place $90-$150/ sq ft with the new construction homes right around $140/ sq ft.  The house next door to the lot I am planning on building on is for sale for $143/ sqft with a pool and has been on the market for 45 days.  I want to sell my spec as fast as possible since I will be paying high interest so I'm thinking I should shoot for $120/ sqft.  That would net me about a $20k profit.  Tight margin but would hopefully help sell quickly but at the same time I don't want to hurt the comps and make my next project worth less. 

Feel free to share your opinions or advice for a new developer.

@Dustin Morgan  Those are VERY tight margins.  What is your experience? Will you be building the home yourself?  Are utilities to the property?  Are you including all your building permits and fees in with the cost per square foot? Materials, labor, etc.? Commissions? Will the finishes be of the same quality as the home next door? What is the market in your area, is there a demand for new homes? What is the rental market? What is the economy in the local area? These are just a few of the things to consider. 

When building "spec" houses, you want to make sure you have done your homework, and that there is in fact a demand in the area for the house you plan to build. 

Most of my thoughts are inline with what Karen Margrave has already told you, but here is goes anyway:

  • Don't go a penny over budget. Your margins are too tight.
  • Vet your builder well. Check his references. If you can pull permits from your city, check references for people that he doesn't provide to you as references.
  • Be on the job site daily. Anything that is not done properly needs to be fixed immediately, while the crews are still there. Fixing things later costs more money.
  • Fully understand every detail and budget line item of your builder's proposal. They likely have given you allowances for things like tile, flooring, etc.
  • It doesn't matter what homes are listed for, it matters what similar homes have sold for. Keep an eye on that.
  • Educate yourself on what buyers in your area want and build accordingly.
  • Don't be "penny wise but pound foolish." That $200 you saved on bargain tile may be the decision that keeps people from buying your house. This will be a challenge due to budget restraints.
  • If you are responsible for doing so and don't have good taste and a flair for picking finishes, find someone that does and enlist their help.
  • Consider other exits on these properties. Does it make sense to build and hold as a rental? Can you just flip the land? 
  • Personally, I wouldn't do a spec home with margins like this.

I would try to pursue deals with higher margins.  For me it comes down to time value of money.  It takes me almost as long to finish a 1500sf home than a 3800sf home.  I have looked at doing smaller homes before and it is hard as a small builder to compete with the tract home builders.  These guys have corporate discounts and purchasing managers that are able to negotiate in scale .  I have marketed my niche to luxury home buyers and agents and have picked up more custom home builds along the way (margins are about half a spec build, but your not risking your capital).

At the 140 per sq foot mark you have a nice deal.  At 120 per sq foot you do not have a nice deal.  Don't undersell your property either.  I think at 140 sq foot your list would be about 210k, maybe try listing at 199k to get some interest?  

You mentioned the the home next door...whats the condition of the home?  If you have new construction selling for 140 sq foot then those are your comps.   

Thank you everyone, I will take your advice under advisement.

I just completed my first spec on the EAST coast and I live in Oregon... we sold at a little over 200 a foot ... bought the lot for 45k.. so nice margins on that one.. Also our house is the subject of a reality show called Southern Charm.. so when I get a video link I will post it.. Well I won't but someone I know that knows how to do that stuff will.

On the west coast at the sales point your talking about if you can get a quick sale and make 20k net that's not so bad... Our margins in Oregon on low end are not much better even for the production guys.. And I can't see how the guys in Texas that sell brand new homes for 100 a foot do any better than 20k per deal either.

@Jay Hinrichs  Ok let's hear the details! How many square feet, selling price, cost to build, etc. Where on the east coast? And how did you get it on a reality show? Can't wait to hear about that. How exciting. 

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