Let's Build a Spec House!

[Get Right]

With my new found freedom (see Anniversary post for background) my mind has been working overtime on something fun (and fastlane) to do. I evidently don't handle boredom well. So I started another business building a spec home(s). Since there isn't much real estate talk here I thought you might enjoy watching the roller coaster that has just begun. I'll try to give you the ups and downs the best I can. Feel free to repeat my process/ask questions/make suggestions, whatever you like.

The Market (research) - I was reading a housing report a few months back. The report showed our area to fall 8,000 housing units behind what was needed to sustain our area. Basically we were going to have a lot of people looking for houses that weren't there/built. I did some market research and sure enough the housing inventory was being depleted at a rapid pace. Another sign the report might be right was rapidly increasing housing prices. If this continues we should see a much higher demand for the next 3 years (estimated time to recover housing stock).

The Idea - Build a spec home(s) for the anticipated market.

The UVP - I've been paying attention to a certain "style" house that is built a few hours from here. Everybody ooo's and ahh's at them but nobody has brought them to my area. There's not an obvious reason they aren't here and I am very involved in the industry.

The Leverage - I'm an Architect by trade so I have quite a bit of leverage to use. The main ones are:

· Deep residential experience (design and construction)

· Ability to get deep product and sub-contractor discounts

· Huge rolodex of professionals I work with already (accountants, bankers, etc.)

· I've built 3 buildings myself before (none SFR)


CENTS - Hey, its the Fastlane Forum - you think I would forget that

· Need - Established by market research

· Entry - Not easy to put all the pieces together, high $, I own the land

· Control - I am the major shareholder

· Scale - I am only really limited by the ability to purchase lots at the correct price. I should be good up until about 30 spec homes.

· Time - Most of the work will be on the hands of others but I will participate heavily (because its fun). Future decreasing of my time should be possible due to the repetition I plan.


The Money - Building spec homes is very expensive. I will take on a few partners for start up money then leverage our credit/track record for a portfolio bank loan.


The Plan - I've seen people build a spec house or 2 before. One of the major problems I see is that they only build 1 at a time. This would take you FOREVER to make any significant money. Therefore I plan to build 30! But not so fast, I will have to stage them to make the whole process work. I will start with 3 houses (I am estimating a 5% cost savings just by building 3 at a time). I will then start additional ones as the first houses sell (this will make the bank happy and possibly increase the portfolio loan).


The Disaster Plan - Yeah, I still do those....so what happens if it doesn't work (ouch)..... I set up a system of partners in a manner that if we built 3 and none sold, we could each move into one. The main objective would not be achieved buuuut at least we would be financially safe and be able to maintain our bank love. Bonus - they will be pretty sweet spec homes.


Sooooo - let's build a spec home!

 

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[jon.a]

With my new found freedom (see Anniversary post for background) my mind has been working overtime on something fun (and fastlane) to do. I evidently don't handle boredom well. So I started another business building a spec home(s). Since there isn't much real estate talk here I thought you might enjoy watching the roller coaster that has just begun. I'll try to give you the ups and downs the best I can. Feel free to repeat my process/ask questions/make suggestions, whatever you like.

The Market (research) - I was reading a housing report a few months back. The report showed our area to fall 8,000 housing units behind what was needed to sustain our area. Basically we were going to have a lot of people looking for houses that weren't there/built. I did some market research and sure enough the housing inventory was being depleted at a rapid pace. Another sign the report might be right was rapidly increasing housing prices. If this continues we should see a much higher demand for the next 3 years (estimated time to recover housing stock).

The Idea - Build a spec home(s) for the anticipated market.

The UVP - I've been paying attention to a certain "style" house that is built a few hours from here. Everybody ooo's and ahh's at them but nobody has brought them to my area. There's not an obvious reason they aren't here and I am very involved in the industry.

The Leverage - I'm an Architect by trade so I have quite a bit of leverage to use. The main ones are:

· Deep residential experience (design and construction)

· Ability to get deep product and sub-contractor discounts

· Huge rolodex of professionals I work with already (accountants, bankers, etc.)

· I've built 3 buildings myself before (none SFR)


CENTS - Hey, its the Fastlane Forum - you think I would forget that

· Need - Established by market research

· Entry - Not easy to put all the pieces together, high $, I own the land

· Control - I am the major shareholder

· Scale - I am only really limited by the ability to purchase lots at the correct price. I should be good up until about 30 spec homes.

· Time - Most of the work will be on the hands of others but I will participate heavily (because its fun). Future decreasing of my time should be possible due to the repetition I plan.


The Money - Building spec homes is very expensive. I will take on a few partners for start up money then leverage our credit/track record for a portfolio bank loan.


The Plan - I've seen people build a spec house or 2 before. One of the major problems I see is that they only build 1 at a time. This would take you FOREVER to make any significant money. Therefore I plan to build 30! But not so fast, I will have to stage them to make the whole process work. I will start with 3 houses (I am estimating a 5% cost savings just by building 3 at a time). I will then start additional ones as the first houses sell (this will make the bank happy and possibly increase the portfolio loan).


The Disaster Plan - Yeah, I still do those....so what happens if it doesn't work (ouch)..... I set up a system of partners in a manner that if we built 3 and none sold, we could each move into one. The main objective would not be achieved buuuut at least we would be financially safe and be able to maintain our bank love. Bonus - they will be pretty sweet spec homes.


Sooooo - let's build a spec home!

This might be fun.

 

[MKHB]

With my new found freedom (see Anniversary post for background) my mind has been working overtime on something fun (and fastlane) to do. I evidently don't handle boredom well. So I started another business building a spec home(s). Since there isn't much real estate talk here I thought you might enjoy watching the roller coaster that has just begun. I'll try to give you the ups and downs the best I can. Feel free to repeat my process/ask questions/make suggestions, whatever you like.

The Market (research) - I was reading a housing report a few months back. The report showed our area to fall 8,000 housing units behind what was needed to sustain our area. Basically we were going to have a lot of people looking for houses that weren't there/built. I did some market research and sure enough the housing inventory was being depleted at a rapid pace. Another sign the report might be right was rapidly increasing housing prices. If this continues we should see a much higher demand for the next 3 years (estimated time to recover housing stock).

The Idea - Build a spec home(s) for the anticipated market.

The UVP - I've been paying attention to a certain "style" house that is built a few hours from here. Everybody ooo's and ahh's at them but nobody has brought them to my area. There's not an obvious reason they aren't here and I am very involved in the industry.

The Leverage - I'm an Architect by trade so I have quite a bit of leverage to use. The main ones are:

· Deep residential experience (design and construction)

· Ability to get deep product and sub-contractor discounts

· Huge rolodex of professionals I work with already (accountants, bankers, etc.)

· I've built 3 buildings myself before (none SFR)


CENTS - Hey, its the Fastlane Forum - you think I would forget that

· Need - Established by market research

· Entry - Not easy to put all the pieces together, high $, I own the land

· Control - I am the major shareholder

· Scale - I am only really limited by the ability to purchase lots at the correct price. I should be good up until about 30 spec homes.

· Time - Most of the work will be on the hands of others but I will participate heavily (because its fun). Future decreasing of my time should be possible due to the repetition I plan.


The Money - Building spec homes is very expensive. I will take on a few partners for start up money then leverage our credit/track record for a portfolio bank loan.


The Plan - I've seen people build a spec house or 2 before. One of the major problems I see is that they only build 1 at a time. This would take you FOREVER to make any significant money. Therefore I plan to build 30! But not so fast, I will have to stage them to make the whole process work. I will start with 3 houses (I am estimating a 5% cost savings just by building 3 at a time). I will then start additional ones as the first houses sell (this will make the bank happy and possibly increase the portfolio loan).


The Disaster Plan - Yeah, I still do those....so what happens if it doesn't work (ouch)..... I set up a system of partners in a manner that if we built 3 and none sold, we could each move into one. The main objective would not be achieved buuuut at least we would be financially safe and be able to maintain our bank love. Bonus - they will be pretty sweet spec homes.


Sooooo - let's build a spec home!

Sound Exciting!

• Are you talking scattered lots or doing a take down deal with a master developer?
• Would you draw separate plans for each or have 2 or 3 models?
• Would you allow pre-finish closings and owner's ability to make cosmetic changes alterations, carpet/cabinets/colors?
• Can you still get construction to perm financing like we did in early 2000's, to transfer the financing burden once sold and buyer is approved?
• Is this going to be a"Licensed Architect designs custom homes at production home prices" economics type of story, or will it be based on the the unique locations you source (lots) and appeal to those who don't want cookie cutter homes and are willing to pay more?

This would go over really well in market constrained areas, where new home development is limited and the home flippers have already repurposed all the low lying fruit(cosmetic fixers) and are probably not skilled enough or crazy enough to mess with entitlements/plans/permits and building from scratch.

MK

 

[Bellini]

@Get Right ~ This sounds great. I really like your ideas.

Sounds like you've put a lot of thought into it.

So Florida is growing faster in population than the available housing?

 

[Get Right]

• Are you talking scattered lots or doing a take down deal with a master developer?

• Would you draw separate plans for each or have 2 or 3 models?

• Would you allow pre-finish closings and owner's ability to make cosmetic changes alterations, carpet/cabinets/colors?

• Can you still get construction to perm financing like we did in early 2000's, to transfer the financing burden once sold and buyer is approved?

• Is this going to be a"Licensed Architect designs custom homes at production home prices" economics type of story, or will it be based on the the unique locations you source (lots) and appeal to those who don't want cookie cutter homes and are willing to pay more?

Thanks MK

• Scattered lots on purpose. I hate repetition of house designs (next to each other).
• Actually just 1 model but you won't be able to see 1 house from the next
• Absolutely pre-finish closing but with a limited list of customer changes
• Yes sir, it removes some element of control and more liability but possible
• Both

 

[Get Right]

@Get Right ~ This sounds great. I really like your ideas.

Sounds like you've put a lot of thought into it.

So Florida is growing faster in population than the available housing?

Thanks Bellini - Our specific area is growing way faster than housing. I am trying to respond to the market needs/wants. Normally I would steer away from specs but the time is right (IMHO). I think the window is short however (3-4 years).

 

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[MKHB]

Thanks MK

• Scattered lots on purpose. I hate repetition of house designs (next to each other).
• Actually just 1 model but you won't be able to see 1 house from the next
• Absolutely pre-finish closing but with a limited list of customer changes
• Yes sir, it removes some element of control and more liability but possible
• Both

This seems like a great plan and you being an Architect you have the technical part more than covered.

 

[LateStarter]

I'm definitely interested in hearing more about this. I have recently been thinking of some ways to merge two growing housing trends while reducing the build costs. As a current buy and hold real estate investor I'm always looking for ways to scale that business. Local prices put self managed apartments out of reach so I'm still dabbling in smaller multifamily options. 'Developing' entry level housing options is an area I'd like to pursue locally to fill a need in my overpriced market.

I'm curious to hear what would differentiate you from other modular home solutions where you can get more customization. PM me if you're rather not disclose publicly.

 

[MarkNNelson]

With my new found freedom...

Be careful. Knowing you, the process you're about to go through will generate a ton of new ideas for needs to fill in the SFR-builder space, and then you'll really lose your man-of-leisure status.

 

[Get Right]

I'm curious to hear what would differentiate you from other modular home solutions where you can get more customization.

Thanks Latestarter - I'm doing quite a few things to differentiate. The main play though is scarcity. There just isn't any inventory to compete with. I know that will change but by then I should own all the lots

Other plays are providing the customer lots of value they can't typically get - like Architect designed production houses, designer series equipment (due to bulk purchases), and also trying to set up a financing solution for buyers.

 

[Get Right]

Be careful. Knowing you, the process you're about to go through will generate a ton of new ideas for needs to fill in the SFR-builder space, and then you'll really lose your man-of-leisure status.

Ha! Very true.

 

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[Bellini]

Thanks Bellini - Our specific area is growing way faster than housing. I am trying to respond to the market needs/wants. Normally I would steer away from specs but the time is right (IMHO). I think the window is short however (3-4 years).

The same thing is going on where I live. Residential construction is everywhere.

I think you may be right about the short window, though. I'm concerned that another bubble is forming!

 

[Tip Toe]

Livin' the dream. Nice to see an experienced architect here take it to the next level.

Could you give an example of the kind of "style" you mention or PM it if you wanna keep it secret? (Architecture Graduate from the UK where all development builds are quite similar to each other.)

In the disaster plan scenario is the selling of the lots seperately to small contractors with all the drawings and permissions an option to recoup costs?

 

[Get Right]

Update and Question for you!

Update: Just closed on the first lot woohoo! I like to think I bought this one "right". It's really important to get the land at the right cost. If you don't it eats a really big chunk of your profit. I would rather wait (or not build) than to pay too much for a lot. I leave overpriced lots for people to build their personal houses on (they don't need to profit).

Question for you! - Would you rather me leave this progress thread on the outside and keep some details private?......or....move it to the INSIDERS and spill all the beans (show you the numbers)? Would love input on this from @MJ DeMarco @AllenCrawley @Vigilante @Andy Black

 

[jon.a]

Update and Question for you!

Update: Just closed on the first lot woohoo! I like to think I bought this one "right". It's really important to get the land at the right cost. If you don't it eats a really big chunk of your profit. I would rather wait (or not build) than to pay too much for a lot. I leave overpriced lots for people to build their personal houses on (they don't need to profit).

Question for you! - Would you rather me leave this progress thread on the outside and keep some details private?......or....move it to the INSIDERS and spill all the beans (show you the numbers)? Would love input on this from @MJ DeMarco @AllenCrawley @Vigilante @Andy Black

I didn't make the cut. But, inside with details.

 

[MJ DeMarco]

and spill all the beans

Why would this be risky? I think you're OK as long as you don't post private deets, addresses, contractor names, etc.

 

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[MKHB]

Be cautious, you will garner a lot of attention now that the the low lying fruit of easy fix and flips have evaporated (in good markets). Even the big flipping sites are adding more spec content.

However, you are already way ahead of the game with your experience.

The progress threads on the other sites are mostly by novices; they are surprised by issues like public notice, impact fees, SWPP issues, tree saves, erosion, lot hydrology, all the things we turn to guys like you (architects) on.

This is gonna be fun to watch...way to jump right in @Get Right.

 

[MKHB]

Thanks MK

• Scattered lots on purpose. I hate repetition of house designs (next to each other).
• Actually just 1 model but you won't be able to see 1 house from the next
• Absolutely pre-finish closing but with a limited list of customer changes
• Yes sir, it removes some element of control and more liability but possible
• Both

For what it's worth.... my recent experience with spec building-post 2007...

I do commercial real estate advisory for family offices and we have 3 high net worth individuals in the DC area that have bought specs off plans in the North Carolina, (Saint James Plantation outside of Wilmington) from a merchant builder and then customized.

Sustainable Features
The plans were all done by the builder and the only reason I got involved because I have a LEED AP BD&C designation and the only person on our advisory team that has any construction experience, and these clients are very energy conscious, therefore; I served as a quasi CM (poorly) and helped them spec and buyout ultra high efficiency HVAC, -custom low uv windows, thermal heating, permeable hardscapes, and solar gardens. Items that the builder did not offer and would not warranty.

Value Proposition
Point being, these clients were able and willing to pay top dollar, but the spec builder didn't want to alter the plans in any way nor get involved in any non standard changes. We had to go out and get the MEPs, site, drainage, and setback sections re-stamped by local engineers at our cost, and still had to pay the sellers GC a 15% fee of all extra soft and hard costs. Ironically the builder could of put all of these options into a sustainable model feature and actually charged even more.

High Margins
Bottom line, this spec builder had a take down agreement with a master developer in this in-demand area and our clients would not even consider alternative locations. This seller made when it was all said and done, by my estimates, a 20-25%, margin on the sales cost of over 600k. Amazing considering that he didn't have the pans drawn by a real architect (in NC you can use a draftsman/and hire out the wet stamps) and he hired a GC to build the homes, and paid a realtor the full 6% commission on all sales.

Downsize to Quality
He was just smart enough to secure the right dirt and market it towards the right clientele, buyers who know what they want and are willing and able to pay for it. I have seen this "downsize to quality" trend happening in other areas as well, NC/SC/San Diego/OC/LA.

 

[Get Right]

Nice write up MKHB! Thanks for sharing.

I too am a LEED AP (one of the first in the state). In my area we typically don't see too many people interested in "green" design. I do however put lots of "green" features into my designs without their direct knowledge. It usually doesn't cost any more.

Point taken about gearing the sale to the anticipated client. I might use your example to narrow down my perfect prospect. As in your example, it might increase the profitability as well as length of time on the market.

 

[MKHB]

Nice write up MKHB! Thanks for sharing.

I too am a LEED AP (one of the first in the state). In my area we typically don't see too many people interested in "green" design. I do however put lots of "green" features into my designs without their direct knowledge. It usually doesn't cost any more.

Point taken about gearing the sale to the anticipated client. I might use your example to narrow down my perfect prospect. As in your example, it might increase the profitability as well as length of time on the market.

@Get Right Awesome, you got all the skills.

LEED's operational advantages are debatable, but from a marketing perspective, our fortune 5 and funds clients demand it. And the buyers I spoke of, were all former C-suite types.

Keep us posted - as disclosure permits.


MK

 

[rc08234]

I just moved to Florida, I source lots and tear downs for builders. What part of FL are you in?

 

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[Bouncing Soul]

We tried to buy a couple LEED houses in my area and they were sold really quickly.

In Florida I'd think you could find the demand for that kind of product where the startups/engineers are. Boynton Beach, Dania etc.

 

[Get Right]

We tried to buy a couple LEED houses in my area and they were sold really quickly.

In Florida I'd think you could find the demand for that kind of product where the startups/engineers are. Boynton Beach, Dania etc.

That's very interesting - thanks for sharing! Frankly, I hadn't considered making it a LEED Homes project buuuuut....hmmm.

 

[Bouncing Soul]

That's very interesting - thanks for sharing! Frankly, I hadn't considered making it a LEED Homes project buuuuut....hmmm.

I am an engineer, and have been in that area half a dozen times working with Motorola a while back. We've recently been discussing moving to that area and thus looking at real estate around there casually...I'd want to be your customer, to say the least.

 

[Get Right]

Update of where I am:


Lots - I've been looking for awhile and probably found 12 that work. Remember I am going for repetition so the lots need to be decently similar. What I'm trying to do is buy them right (read inexpensively) and in somewhat of an order. I am trying to quietly pick up the "cheap" ones first. Lot #1 is now closed. Lot #2 had a difficult owner so we couldn't agree on terms - on to the next...


Money - It's going to take $1.03M to build these ($342k each). Typically that is going to require $200k down for our team get a bank loan. We don't want to put that much in so the lot purchasing has to be "right". With the instant lot equity we are putting down $120k in addition.


Partners - I had to take on 2 partners to do this. I will hold about 60%. I selected partners based on how I worked with them before and what they could bring to the table.


Bank - Now this is a big deal. One of my partners has the bank connection. This will be his major contribution (read - he is very well off). We will be asking for $800k to start and don't expect much of a problem. One of the benefits of keeping a big rolodex is having access to lots of these guys.


Design - I designed a pretty sweet house (IMHO). It's designed for what the market wants, repetition, speed, profit etc. It is roughly 3,000 square feet. Check it out:

Profit - I am estimating a profit of $74.4k per spec. This would translate to $223k for the first 3. I would retain 60% so my best guess is putting $133k in my pocket.


Time - I am shooting for 9-12 months to get the first 3 built and sold.


Questions? Ask away

 

[rc08234]

Whats the end selling price?

 

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[Get Right]

I just moved to Florida, I source lots and tear downs for builders. What part of FL are you in?

Little too personal, sorry.

Whats the end selling price?

$400k-500k range

 

[rc08234]

Little too personal, sorry.


$400k-500k range

No problem, I'm in the tampa area if you happen to be in that area and need some help picking up lots. Look forward to the progress

 

[Get Right]

Update time! I've been cranking on the spec house for 3 weeks now. Accomplished:

• Drawings finished
• Soil borings finished
• Contractor quotes finished
• Realtor package ready

So here is where it gets interesting. The contractor pricing came in too high. Lowest qualified bid was $449k. Problem is, the real estate team doesn't like pricing the home over $475k. Assuming a full price sale...that would represent a $12k loss. That leaves me with 2 options:

• Kill the deal and unload the lot
• Find another way

And here is where most people give up. They would scrap the deal and go find another shiny object. Not me. To me - this says "Hey, another barrier to entry. There is some gold here to find".

So I took the contractor estimates and started looking for money. 2 areas stuck out. The framing labor was $39k and the contractor overhead was $47k. These are in line for our area buutt very high (for the service provided). Framing only takes 2 weeks and most contractors spend less than an hour a day on a residential job. So I am going to get my contractors license (not hard). I am also putting a framing crew together. This should flip the $ back from a $12k loss to a $65k profit. I repeated this process of analyzing the contractors estimates and have found a total of $125k savings. X3 houses = $375k. Not bad.

With this info, I started the selling process. I have a very interested party already. Meeting again in an hour to try and solidify.

 

[Get Right]

First house is sold!! I knew the buyer and that they were looking. I showed them what was to come in the next few months. They bought it on the spot! Saved me 5% in realtor's fees also

I shrunk the design a little to make it work for their family. The sales price ended up being $375k. My calculations show a $104k profit (not including my time/labor). In the end, they are going to get one heck of a house...one that we can both be proud of.

While I am super excited, I have to close on the next lot asap. It has been dragging due to the price but will start to cost me more if I can't "roll" my subs from one job to the next (5-8% loss estimate).