I wanted to do something a little different, so I borrowed an idea from a couple sports blogs I follow and decided to start a 3 on 3 series. In each article three investors with experience in the subject area will answer the same three questions. The objective is to provide three perspectives from experts in a given field. To start the series I am going out of my knowledge area and into one I am interested in; spec building.
Spec(ulative) building is building properties for which no buyer has been pre-identified and carries the risk that the finished product will be difficult to sell at a price yielding acceptable returns.
Answering the questions will be:
Rich Weese – Rich has been investing involved with real estate investing for over 40 years and has experience in nearly every aspect of investing. During this period he has built over 75 homes.
Peter Giardini – Peter Giardini has been an active real estate investor in the Baltimore Maryland region for the past 10 years. He has purchased and sold over 120 properties and currently invests in 10 –15 properties a year. Peter is currently involved in a development deal in North Dakota.
Jon Klaus – Jon has owned and flipped properties over the past 20 years, but started focusing on building a portfolio in 2009. In 2011 he built his first spec home which was recently sold.
3 on 3: Spec Building
1: What advantage do you find spec building to have over other real estate investing strategies?
Rich: The advantage I see with spec building over other real estate investing strategies is the lack of competition. It seems like when a good idea comes along like flipping, or rehabbing, or wholesaling, everyone and their brother get involved in that. This tends to drive the prices up and make the spread far less than what an investor would like to see.
The other benefit is it seems much easier to find private money to use for building spec homes as opposed to flips.
Pete: The primary advantage that I see for spec building is that you start with a clean slate regarding the building and most if not all of issues are removed during the design of building. Every rehabber knows that each new project brings and endless opportunity for surprises and the attendant increase in costs and completion date extensions. Just think undiscovered termite damage!
Jon: Spec building has its place in the upswing in the real estate cycle. Now is the time for providing new in-fill housing in areas of growth, where new builds have lagged over the past several years. More and more areas now have pent-up demand for new homes. Spec building takes your time, attention and capital (doesn’t have to be your money), and can provide outstanding returns in a fairly short time period.
2: Where are you currently building and what drove you to that market?
Rich: I am currently building in two different locations; homes in the $100-$170,000 in the Rio Grande Valley of Texas and $300,000 homes one hundred miles north of Las Vegas in a retirement community known as St. George, Utah. I am targeting wealthy individuals that are looking to this area for a second home and generally pay cash.
Pete: My market for new development is in Central North Dakota. While I haven’t done any spec homes there I am involved in raw land development where once the land is platted the lots are sold to builders who in turn build on speculation…well, if you could call it that. Most homes are sold before the ground is broken for the footings. As for selecting North Dakota… just think a growing oil patch with billions of barrels of oil being put into production, unemployment rates less than 3%, and Wal-Mart wages from $12 to $15 per hour.
Jon: I just sold a project in Central East Austin. This is in a gentrifying neighborhood that is close to downtown, the state capital, and the University of Texas. I had an active partner on the ground in Austin, while I was the passive investor. We bought a lot (old small house on it) for $72K, built for about $93K, and sold for $265K, giving us $100K in gross margin.
3: What piece of advice would you give to someone looking to expand their investing to spec building?
Rich: I would urge anyone interested in building spec homes to double and triple check in making sure the lot they are purchasing is a fantastic deal. The majority of the profit is made with the acquisition of the lot. The second thing would be to make sure that you have shopped contractors until you are exhausted. I’ve actually had general contractors sign on the building permit and only charge me a week usage of my condo in Cancun providing I oversee all of the construction and higher only licensed subcontractors.
Pete: If you decide to enter into the spec building market you better know your local market. What are the employment factors? What is the absorption rate (properties listed vs. properties sold) for existing homes? If that number is greater than 50% you should do well. Of course the average sales price for existing and newly built homes has to support a new build.
One of tall poles in that tent is the cost of the land. Its one thing to purchase land at $18K an acre and then sell it for $30K a lot fully developed, which is possible in North Dakota. It’s another thing altogether to pay upwards of $100K just for a buildable lot, especially if new home prices are below $200K.
Jon: Know your market. Learn what new homes sell for and how long they take to sell. Learn what the buyers want and will pay for. Be ready to offer more for less. Learn the city’s requirements. Know your general contractor well, and watch closely. Know your competition. What are they doing? How can you do better? Have a contingency plan for if/when things go wrong. If you are an experienced rehabber, run the numbers for spec building vs. rehabbing. You might find it makes more sense to build than to rehab.
And a warning; spec builders are notorious for over extending. Be disciplined, focused, and continually manage your risk. When the housing cycle peaks, be ready to stop building and wait for the sweet spot in the next cycle.
As you can see spec building can be a very lucrative investment, but like other investments requires an understanding of the process and risks. Thanks to Rich, Pete and Jon for their knowledge and willingness to share.
New House Image From FreeDigitalPhotos.net