Review: Profits in Building Spec Homes

[Jason_MI]

Not a lot of people, particularly in my area, are thinking of building spec homes right now…but every time an area begins to grow, every person with two nickels to rub together comes out of the woodwork and wants to be a ‘builder’. In fast growing areas with the right design, just about anything will sell, but like anything else, it’s a business, and should be treated as such. After 15 years in the business, I’m still truly shocked that so many builders don’t treat it as a business. So, for those of you who want to get into the spec-building business, which can be quite profitable, I’d highly recommend Profits in Building Spec Homes by William Maddox.

As you can imagine, the book is about…building spec homes, and it takes you the various decision making processes that most people SHOULD go through in order to be successful; selecting the right area/neighborhood, selecting the right design, drawing up contracts, budgeting, etc. The book is dense with forms, processes, and tips, and it’s very well written and easy to read in a step-by-step format. Most of it is quite obvious stuff, but I do want to point out some things I picked up that I thought were provocative/important:

• This is a business, and it really is a tough business. Unlike other manufactured goods, a spec home might not be sold before it’s created, making it one of the most expensive ‘purchase’ items for people, and since most builders aren’t large companies, the risk can be enormous. To mitigate those risks, everything from contracts and purchasing and design must be run in a business-like manner.
• The most important item is the schedule. It’s also generally the most lassiez-faire item for most builders. Schedules control profit and the velocity of your money; they control whether the project will be successful or not, and they control how much money you can make in a year. A house can be built in six months, or a month with no change of quality, meaning you can build 2 or 12 in a year. Given that the average here used to be about $40K profit per house; which would you rather make? 480K in profit in a year, or 80K?
• The lowest bidder IS the key. Yes, yes, yes; the ‘common wisdom’ has always been to never take the lowest bidder, as that automatically leads to poorer quality. But again, this is a business decision; each bidder has the exact same specifications and details they’re bidding on; quality, materials, labor, timelines—it’s all in there. You want the lowest bidder that will satisfy your specifications. Paying anymore than that is lost profit.
• If you have an interest in this type of investing; building spec homes, now is the time to investigate, start making contacts, and start figuring it out. Again; when the market is good, everyone is involved, and newcomers to the market play catchup until they’re generally left holding the bag. Good builders (and good businesspeople in many areas), don’t wait until popular money-making trends are splashed on headlines; they do their work to be poised to take advantage of the upward trends.

I built specs for 15 years, and my advice is that if you’re interested, this is $30 well spent.

[ame="http://www.amazon.com/Profits-Building-Homes-William-Maddox/dp/0934041938/ref=sr_1_1/102-6463481-0475360?ie=UTF8&s=books&qid=1190898791&sr=8-1"]Amazon.com: Profits in Building Spec Homes: Books: William A. Maddox[/ame]

 

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[ProInvestor]

I like builders building the same type of house, on multiple sites (in a street row) using apprentices.
You get the economics of scale plus low labour costs.

As for lowest - make sure they have the correct insurances (esp. for shonky building work), there are quite a few builders who build and then close down their company...

Looks like a very interesting book!

Rgds.
ProInvestor

 

[Jason_MI]

I think the next big step is going to be in preassemblies/components. Just as so many houses now use trusses, they're already starting to use wall panels, basement panels, etc., but I think that'll catch on like wildfire in 2010. Then we'll go the Japanese-style modular homes.

 

[ProInvestor]

++Rep!

I'm seeing more prefab taking place for multifamilys.... So quite similar to modular....

Thinking more about lowest bidder, also look at the time they think it will take (and beware of too short or too long times).

Rgds.
proInvestor

 

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[bflbob]

I think the next big step is going to be in preassemblies/components. Just as so many houses now use trusses, they're already starting to use wall panels, basement panels, etc., but I think that'll catch on like wildfire in 2010. Then we'll go the Japanese-style modular homes.

Yep...we use panelized systems in building our Senior Living Centers.
We can frame up a few buildings in one day with a small crew and a crane/lift.
A BIG labor saver!:iagree:

 

[Jason_MI]

I was an SIP builder. I'm looking right now at modernist prefab using precast concrete walls. But it's going slow; my partner is an architect. :smx3:

 

[EasyMoney_in_NC]

Interesting post. I have a couple of things I'd like to say. Your last comment about "if your interested in this type of investing"........spec building really isn't investing, you are correct though that it is a business, which is why a building company can't 1031 out of properties. Spec builders area retailers of homes, not investors.

As for the book, as a long range aide I would think it would be a help, but you can't just boilerplate teach how to build in a market. I have been an architectural draftsman for a number of years, sold RE for a few (to learn my market), and have been building since the mid 90's. It took me all those experiences to really get "right" all that was needed to be known to be able to make money. There's still the finance system, the tax system, local and state requirements, etc......IMHO only once you've gotten a handle on all that is it really possible to make $$. Some guys do get lucky in good times, but to sustain, that's a different beast.

From an investment side of the conversation, I realized (once I understood the systems) that building for rent, not sell is where the real money is. Why sell, when the same $40K could be pulled out tax free (refi out of construction funds), while still cash flowing, offering depreciation and appreciation? When you sell you pay taxes, when you refi, you pull money to re-invest and keep both prizes.......sounds like a no brain'er to me

Just my .0002 cents

 

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[nomadjanet]

Now everyone here thinks they can build their own home. If they have ever seen a 2 x 4 stud or walked through a Home Depot in their flip flops they are a builder. I think many areas of the country are seeing this.

When you pick the lowest price sub's do you have any issues with them being able to stick to your tight time schedule? Think about it, if you are a sub & builder 1 is paying you $500 a day for your crew and builder 2 is paying $700 a day for your crew, where are you going to send them? Who are you going to make excuses to instead of showing up? When you squeeze a sub to the lowest possible penny are you going to get the best performance?

We have built a few homes for our investments and for family members, time is very important as you say. Every time we have had time issues with a contractor it has been because we took the lowest bid. Every time we have come in with time left over, 80% of our bids were in the middle. We made more money on the faster jobs. The difference in the bids of a few hundred dollars each was not worth the hassel of taking longer to complete the job. Just my experiances.
Janet

 

[bflbob]

When you pick the lowest price sub's do you have any issues with them being able to stick to your tight time schedule? Think about it, if you are a sub & builder 1 is paying you $500 a day for your crew and builder 2 is paying $700 a day for your crew, where are you going to send them? Who are you going to make excuses to instead of showing up? When you squeeze a sub to the lowest possible penny are you going to get the best performance?

Janet

I'll agree.

When we've gone with the cheapest sub, we've ended up with problems with the Dept of Labor (much of our work is with government entities, requiring negotiated pay rates), cashflow issues with the sub ("I need a check Friday to meet payroll"), and with the subs not paying their suppliers (you end up footing the bill, thanks to mechanics liens).

In order to keep the projects moving, you need to jump through hoops to keep the subs happy and on the job.

Sometimes it is worth it...sometimes not.

 

[Jason_MI]

Jeez; didn't mean to open a can of worms here, but here goes.

EasyMoney; I'd disagree with two points; one....like anything else, spec home building may or may not be 'investing'. Not to get caught up in semantics, but just like many other types of vehicles, if you're running the build, you have a job; if you're Pulte and have a huge company that builds 1000's of houses every year, and you're sitting on a beach somewhere else; that's an investment. And buy and hold is great; if it's what gets YOU to your goals and is part of your plan. It's not in mine.

As for the lowest priced sub; please read the point...which was the SAME specifications; that is quality AND time...both in completion and starting. If you get two identical things; why would you pay more for the other?

 

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[EasyMoney_in_NC]

Sorry, and you didn't open a can of worms, just lets set things strait.

From a tax stand point, if you move more than....I think it 3 properties (DIANNE???) a year or more, you are seen as a real estate "retailer" and that is a business. It has nothing to do with whether or not you "work" the business or not, it boils down to the entities conduct. Now I agree that the Pulte's of the world "invest" in future land holdings for projects, but thats a different beast. What you are doing is buying land, building houses and selling them. If its more than (whatever the correct number is), you are a retailer, plain and simple.

Me on the other hand, I run the site and perform all of the functions as a "job", but I pay myself in tax free refi money, then collect passive income as I make them rentals.....and in time my "investments" will hopefully be worth a lot more than what I have in them.

On the side note of subs (general statements, not directed at anyone here): if you as the contractor understand A) your market being built to B) the quality/dollar value of the work C) and how to negotiate well with subs, then cheapest can work out just fine. When markets are down (like now!) subs are a dime a dozen and when they come to you looking for work, thats the time to pounce. If the job isn't done right or on time, thats your fault as the contractor, learn to do your job. I saved thousands each house by beating the hell out of subs and suppliers. When they get pissed and are ready to walk away from the price discussion, thats when I know I have my best deal. Oh and some of my major subs, I've used for 10 years and they are still part of my work force that helps support the rentals they helped build. Its all in the timing of and negotiations of everything

 

[Jason_MI]

Tax implications are differnet for builders. Then again, I've never paid taxes.

I never had to beat on my subs. They either could or couldn't meet the specifications.

 

[nomadjanet]

As for the lowest priced sub; please read the point...which was the SAME specifications; that is quality AND time...both in completion and starting. If you get two identical things; why would you pay more for the other?

Spec all you want if you get the cheapest guy and he says no man I can't send my crew today, I have an emergency or I need money in advance because I can't pay my guys you don't want to hear that. Many if not most subs are not bonded or insured if they flake out on you there is no protection. So if it works for you, great it has just been my experiance that if the price is to good to be true, its probably not worth the hassel.
Janet

 

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[Jason_MI]

Janet; what's the problem?

I've never used uninsured subs, nor worked for an uninsured contractor....guess what...it's in the specs. Again; what hassle? What's too good to be true? You need a new TV as part of a component package you are supplying to an end customer. You specify what's needed, when, installation, and follow-up service. You provide three dealers with the specs of what you want and they all meet them. Why would you automatically discount the lowest bidder if it meets all your needs?

 

[nomadjanet]

As I said I am only speaking from my own experiance. If yours is different great for you. I also don't say I automaticaly discount the lowest bid, neither do I automaticaly take the lowest bid.

 

[EasyMoney_in_NC]

Tax implications are differnet for builders. Then again, I've never paid taxes.

Because............? You have so many write offs you get money back? Or just refuse to pay taxes? I don't get that comment. And how are taxes different for builders vs. anyone else? Most entity structure is pass through taxation.........please elaborate.

 

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[Jason_MI]

As I said I am only speaking from my own experiance. If yours is different great for you. I also don't say I automaticaly discount the lowest bid, neither do I automaticaly take the lowest bid.

Sorry, guess I was just perceiving quite an attitude about the idea. Yes, I thought it was odd the first time I heard about it, too....but like they say; we can either find tons of reasons why something won't work, or figure out how to make it work.

 

[snowbank]

Jason,

How many spec homes have you done, and what type of money have you made doing this?

 

[ProInvestor]

Taxes shouldn't be a huge problem, usually for a developer houses/units are treated as stock and so any gain is treated usually as income rather than capital gains (which is considered a more one off event).

Also if you are the project manager you can pay yourself a salary (as long as it's reasonable and justifiable) so that can reduce any 'profit' you made on the project.

Here is a deal I was looking at for spec build:
Land: $50,000
Cost: $900 per sq.
Size: 21 Sq
Develop: $180,000 (lock up and sell stage)
Total: $230,000
Sell: $300,000
Profit: $70,000

I like the idea of spec building, usually if there is a good value proposition it will sell. Also people like new rather than old.

Prefab is brilliant! Anything that saves time and money, I tend to like.

Rgds.
ProInvestor

 

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