One of our readers posted the following:
“I am interested in building spec homes in Arizona. I have many questions regarding the spec home industry and have had a difficult time obtaining useful information. Plenty of info on fixers, foreclosures, investment property and such but with regard to building spec homes and the financing, planning construction and selling there just isn't much out there.”
What Is a Spec Home?
So, what exactly is a spec home? A spec home is a house that is designed by a builder rather than a buyer in hopes that someone will come along and buy it. In other words, it’s a home that is built without a buyer. The phrase “spec homes” is actually short for “speculative homes,” meaning the builder speculates that buyers will want to purchase the home when it goes on the market.
Spec homes are ideal for buyers who want to move into a freshly built home relatively quickly, without waiting several months for construction to be complete. The downside is that spec homes cannot be customized, since they are designed by the builder, not the buyer.
Building a spec home can be a great investment if you know the market well enough. The key to successfully building and selling a spec home is understanding your competition and knowing what your buyer wants.
Building a Spec Home
I don't consider myself an expert on spec building, but I have built over 200 homes. Out of the 200 homes I would say 120 of them have been spec homes. I enjoy building spec homes because it is much easier and can be more profitable.
However, it can be risky. To avoid or minimize risk, begin by browsing quality spec house plans. Once you find a spec home plan that you like, make sure you build the house in a good area. The way to determine if a location is a good area is to find out information about the comparables of the homes that have sold in the area.
Another thing I like to do is get the home plan and lot appraised before I start. I then figure out my building costs and determine if there is enough value in building the home in that area. If there is not enough value, DON'T BUILD IT. I did it once and lost $35,0000. Builders like to figure out their costs and then add their profit on top. That is not how value is determined. The value of a home is not created by the builder. It is created by supply and demand.
I like to follow what sells for a higher than usual price. If I find that someone paid more for a home in a certain area, I try and get a lot as close to that home as possible. When someone pays too much, it raises the values of surrounding homes. That is always a good thing if you are building a spec home. Check out the Builder’s Guide to Top House Styles that Sell available for free download here for help understanding what will sell.
Selling Spec Homes
About 70% of my home building business consists of spec homes.. It is more risky to build a home that isn't pre-sold, but it sure is easier, quicker and generally turns out nicer. Most of the risks can be minimized by choosing a good floor plan and making sure it is built in a good location.
However, sometimes a home can sit for a while before it sells. When that happens, there are a few things I do to get rid of it:
Finish construction and clean the house: I rarely sell a house before it is completed and cleaned up. I think it is odd that so many builders get a house most of the way done, but then they don't get it cleaned up and presentable. Cleanliness sells!
Furnish the house: Another method that really helps is to buy a few pieces of furniture and decorate a few rooms. I have a friend at Ashley Furniture who gives me really great deals because I am a repeat customer. They have a great selection online at www.Ashley.com. It is amazing how much different a house feels with a few furnishings. Oftentimes I’ll tell people that the furniture is included if they close within 30 days.
I hope these tips help you, too. Again, the most important aspect of building a spec home has to do with knowing and understanding your market. If you pay attention to what buyers want, and what other homes in the area are selling phone, you’ll be in good shape.
Good luck and happy spec home building!