First time spec home builder few questions/advice ?

Question

Hi, all so as a new spec home builder I am looking to do my first build soon, as someone who has done this multiple times what are common mistakes that has occurred in beginners and if I were to go over budget for example or made a another mistake any ways to fix it what are the consequences in this game if something goes wrong , any other good advice and how has work load been through out the day what a typical day looks like and how involved does it get if hire a project manager? Any any opinions on building in Arizona Scottsdale phoenix paradise area vs like Dallas,tx

Erin Edwards · Answer

I’m in a completely different market—Columbus, OH—but some of the biggest challenges I encountered with my first few spec builds were material delays, scheduling issues with trades, and budget overruns.

On one project, our cabinet supplier sent incorrect or damaged materials multiple times, which caused significant delays. We also ran into challenges with subcontractors not starting when expected or taking longer than anticipated to complete their work.

Now, we make sure all finishes are selected and priced before construction even begins, which helps minimize unexpected costs and budget overruns.

We also provide all of our trade partners with an overall construction schedule so they can plan ahead and have a better understanding of when we'll need them on-site.

As far as financing goes, we initially brought on a financing partner who provided the down payment and secured the construction loan. We've since transitioned to using hard money for our projects because, in my opinion, the flexibility of the draw schedule outweighs the higher interest rate. Having easier access to funds throughout construction can make a significant difference when you're managing multiple trades and trying to keep a project moving.

For what it's worth, there are also lenders who offer ground-up construction loans to borrowers without prior building experience. The interest rate may be a little higher, but lack of experience doesn't necessarily mean you can't secure financing.

Ultimately, I think the biggest lessons I've learned are to plan as much as possible upfront, build strong relationships with reliable trade partners, and choose financing that works with your construction process rather than against it.

Jay Hinrichs · Answer

biggest challenge is going to be your first build with Zero experience behind you as it relates to financing.

I ran into this in Charleston SC when I started building specs there.. I could not get a bank to loan to me because I was ONE out of market and TWO no experience in the market so the first 4 or 5 homes I built there we did it out of cash and proved our model.. once that was done I got a few banks to give me 2 to 3 mil dollar lines of credit to build specs.. and proceeded to build close to 40 more over the last 10 years or so.. So all the advice is all well and good and pretty basic stuff anyone would need to do to be successful at building but finance at a reasonable rate and term is what will get you stuck in the mud.. And for sure the lot needs to be paid for in cash if you want the best chance at financing.. trying to get max debt and being brand new pretty tough you could end up spinning your wheels chasing something that is pretty much reserved for very experienced builders.

Levi Rawlings · Answer

Luis, Devin, and Mark have covered the budget, financing, and lot diligence well, so I'll take the two questions that are still open: how involved you'll be, and the market choice.

A project manager runs the site day to day, but you still own the decisions that move money: approving draws, signing off on change orders, and settling schedule conflicts between trades. On a first build, plan on a weekly site walk with the PM, a weekly budget-versus-actual review, and a rule that no change order proceeds without your written approval. Most of your time goes into those decisions rather than the site itself.

On Arizona versus Dallas, I'd add one check to Luis's comparison: competing supply. Look at how many spec homes in your price band are active, pending, or permitted near each lot. A good margin can shrink quickly if several similar homes finish at the same time as yours, because buyers then have choices while your carrying costs keep running.

Devin Peterson · Answer

Ken, on your question about going over budget, here's how it usually works on the financing side. A construction or spec loan is approved against a fixed budget and paid out in draws after inspections. If costs run over, the lender generally doesn't increase the loan, so the overrun comes out of your pocket before the next draw is released. That's why lenders want to see a contingency line in the budget and proof of reserves.

For a first spec build, expect lenders to ask about your experience or your GC's track record, and leverage may be lower than for experienced builders. Also budget for interest carry through the sale period, not just the build. Permit and approval timelines differ between Phoenix/Scottsdale and Dallas, and every extra month is carrying cost. Getting financing terms in writing before you buy the lot will tell you a lot about which market actually pencils.

Luis Ochoa · Answer

@Ken Feng

Before choosing Dallas or Scottsdale, run the same deal in both: lot price, cost to build per square foot, realistic sale price from recent new-build comps, and months on market. Spec margins get thin fast if resale takes longer than planned.

For a first build, a few habits save the most pain: get the lot's utilities, soils and setbacks confirmed before you buy, lock fixed bids with a clear scope, keep a 10 to 15% contingency, and check how your builder or PM handles change orders and draw paperwork.

If you go over budget mid-build, the realistic fixes are your own reserve, value-engineering the finishes, or a capital partner, and the time to line those up is before you break ground.

Brandon Cobb · Answer

biggest beginner mistake I see is treating the exit price like it is a known number. It is the only number in the whole deal you do not control and it is the one every other number keys off of.

We are evaluating a luxury spec lot in Brentwood right now. About $875k for the dirt and a 7200 square foot house at roughly $265 a foot to build. Our comp engine reached into the wrong submarket entirely so we set the exit ourselves at $4 million off closed sales in that actual pocket. Penciled at about $375k profit and a 9.4 percent margin. Verdict was pursue with conditions. Nothing is closed on it.

That margin is definately the real lesson for a first build. At 9.4 percent a 6 percent cost overrun eats most of the profit and a slow market eats the rest. Carry is what gets first time spec builders more than hard cost. Every month past your schedule you are paying interest and taxes and insurance on the full draw balance with zero revenue coming in.

When you do go over your options are put more cash in or cut scope on finishes or sell at a discount. None of those are free. Keep 10 to 15 percent contingency outside the construction budget and never let the lender's number become your budget number.

A project manager does not take you out of the deal. They run the schedule and the subs daily and chase inspections. You still own the money. Change orders and draw requests and the call on whether a sub gets replaced all stay with you. On one house most guys I know are in it a couple hours a day plus a site walk.

I build in Middle Tennessee so I am not going to pretend to know Scottsdale or Dallas pricing. Pull closed sales in the specific neighborhood you would build in rather than the metro and see which one actually supports the number you need.

also do not manage the build yourself. interview multiple builders, get multiple bids, and run background checks on your builders beforehand. make sure there are no lawsuits or bankruptcies. make sure you have a solid contract in place with your builder who's going to perform on it.

your team is extremely important. what's been really successful for us is having a really good team: a really good builder, architect, designer, and a really good real estate agent who understands the product type that needs to be built, can perform market analysis for you, and can look at absorption rates and current supply.

the last thing you want to do is build something and have it not sell. the market analysis for the types of products that are sitting and the types of products that are selling, the price band, and everything you need to be at are extremely important.

highly recommend that, for your first one, you hire a mentor or a consultant. they can guide you through it. they're going to be worth their weight in gold and will probably pay for themselves multiple times over. pay to learn from other people's lessons instead of paying a bigger price to learn it on your own. i wish i had done this when I started.

Max Comperatore · Answer

Ken, Luis and Devin framed the budget and draw mechanics correctly, and Jay's point about experience pricing is the one that actually kills first builds. Put numbers on it. A construction facility prices at SOFR plus 300 to 400, call it a 9.5% debt constant interest-only. Size it at 65% LTC and 70% of LTARV, whichever is lower. On a $1.4M all-in you are capped near $910k, so $490k of equity is the entry ticket before a single overrun.

Devin's overrun mechanic compounds because draws follow an S-curve, not a straight line. Interest carry runs roughly 55 to 60% of the committed loan times the rate times months outstanding, so a 9 month build plus 6 months of resale at 9.5% on $910k is about $108k of pure carry. Add taxes, insurance, and HOA, and every extra month of Levi's competing supply costs you $7k to $8k. That is why the 10 to 15% contingency Luis mentioned is not a cushion, it is the interest reserve.

On market selection, underwrite horizontal infrastructure per pad before vertical. Scottsdale and Phoenix run $45k to $60k per lot in offsite work, Dallas closer to $30k to $40k, but Dallas pays it back in longer absorption. Run both at a 1.25x DSCR take-out and see which survives a 20% haircut on exit price.

Ken, if the take-out appraisal lands 10% under your pro forma at certificate of occupancy, where does the $90k gap come from?

Nick Pavlakis · Answer

Ask each builder to price the same plans, then put allowances and exclusions side by side. A lower quote can look attractive until you find that grading, utility connections or finishes sit outside the fixed price. I'd want those gaps priced before choosing the builder or setting the contingency.

Divin Kanyama · Answer

@Ken Feng Congrats on getting ready for your first build, and it's smart to ask before you break ground. The most common beginner mistakes are an optimistic budget with no contingency, buying land before checking zoning, utilities and permit timelines, underestimating carrying costs when the schedule slips, and picking subs on price alone. Build in a contingency of at least 10 percent, get firm bids, and underwrite the deal at a conservative sale price.

If you go over budget, the fixes are usually cutting finishes, value engineering, renegotiating with subs or bringing in more capital, and the sooner you catch it, the more options you have. The consequences are real, since a spec home carries loan interest, taxes and insurance every month it sits, and a mistake can turn a profit into a loss or worse.

A typical day is mostly coordination: calls with subs, schedule checks, inspections, material decisions and site visits. A project manager can take much of that off your plate, but you'd still own the budget and the big decisions. For Arizona versus Dallas, both are active, but permitting, lot costs, builder competition and local demand differ, so compare current numbers for the specific submarket before you commit. Just keep in mind this is my general take and not financial or legal advice, so work with a local lender, attorney and experienced builder before you start.

Jeremy England · Answer

Hi Jay. I've got experience. But I have never gone to a bank to ask for a line of credit to build specs with. Didn't know it was a thing to be honest. When you asked for this line, did you already have the lots selected or did you own them already? What's the best approach to get to a yes?

First time spec home builder few questions/advice ?

First time spec home builder few questions/advice ?

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