Let's Build a Spec House!

[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!

 

[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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[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.

 

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[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]

hire a licensed builder as your project manager.

This could be a great idea when/if we get bigger. Thanks.

 

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[Mrs. BRKb]

Managing contractors and subs can be like herding cats, particularly when there's plenty of other work around... lose one job, they just pick up a different one. Crazy.

 

[Get Right]

Are those a quartz counter top?

Thanks! It's actually granite but looks very much like quartz. It's not even very expensive as far as granites go.

I have considered spec building in the past but its hard to compete with the guys satisfied with 5% to 10% margins.

Just a barrier to entry. Climb over the barrier
and there are a lot less competitors.

This 100%, especially if operating with debt not your own cash.

Having cash is a big advantage but you can still do it with OPM. The trick is giving the market what it really wants. If I have something you really want most times you are willing to pay a premium. That premium is one of the differences between my houses and the competition.

 

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[4x4ord]

Congratulations on the progress! The houses are coming out great, you're learning and you're making money. What more could you ask for!

I recently just went back to work for a branch of a large home builder (slowlane, I know). One thing you might consider, once you get your house plans, process and contractors figured out, is to offer to build your spec house on customers existing lots. With a spec as a base, you can leverage cost savings in materials and contractor costs, because you already know what you are building. If the customer wants something outside of the spec, charge a 30-50% markup. If the change come after construction starts, tag on a stiff change order fee.

With this model, you reduce your risk of carrying the cost of the lot and the risk of potentially not selling. The client carries the risk as long as you stay cash positive.

Anyhow, keep up the progress. I'm looking forward to seeing this grow for you. The housing market appears to ripe for new builders.

 

[Blair]

Hey Get Right, just thought id check in and ask how its going with the builds?

 

[Get Right]

How long did this take?

10 months of build time. I build three at a time though.

 

[Get Right]

What work did you hire an employee to do that would cost less than paying a subcontractor?

Interior trim and interior prep/painting.

 

[WJK]

I have a question -- where do you live now?

Rather than building spec houses, with all of the bear traps in the real estate market, I would consider another plan IF I was in your shoes...

With the current tax laws that allow one to pay NO taxes on a large amount of the profits from an owner occupied SFH (single family home) when sold -- why not find a situation where you can buy the right property well, live there during that prescribed holding period, max out the market value through sweat equity, and then sell -- all to do it all over again with the next house.

OR -- rehab or build one small-unit building (2 to 4 units). Rent out the extra units and live in one, while you rehab or build the next small-unit building -- that you move to when you get that first unit ready for occupancy. By living there, and the fact that it is under the commercial lending threshold, the project qualifies for regular owner financing. That will limit your financial exposure and give you help with the mortgage nut.

My mentor, Alice, taught me to start out live in my smallest property and rent out the rest of my properties so they can pay for themselves, and be a step up to more assets. I have learned over these last 41 years that Alice was right. She also taught me to do what I have to do, to get the properties ready to sell or rent. My path hasn't been flashy or sexy. Real estate is a game of LOTS of hard work (sweat equity), patience and good chess moves. I'm not too good to do any "dirty work". My Juris Doctor degree doesn't exempt me from picking up trash, pulling weeds, mowing lawns, washing & painting walls, cleaning toilets and anything else -- when it needs to be done. Getting dirty, by doing my part, is my badge of honor.

This is just my humble opinion of your plan. You may be really successful on OPM (others people's money), but this is my 6th business cycle since I started my real estate career, and I've seen a lot of people go deeply in debit, rise quickly and then crash in flames...

 

[WJK]

Thanks. I've been playing Monopoly with real money for about 40 years, as part of my real estate career. (And I have a whole list of licenses, degrees, credentials and experiences.) So, the guy didn't like my comments. Sorry about that. I was trying to tell him about reducing his risk factors. I take calculated risks all the time and I spend a lot of time upping my odds. His plan sounds to me like jumping off of a cliff.

 

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[WJK]

I think I did a good job mitigating risk. The market research, the skill-sets, back up plans etc. What scares you?[/QUOTE]

The first thing that scares me is the OPM (other people's money). By bring in investors, you loose control of the project. It's like inviting a 600 lb gorilla to the party and expecting him to behavior while you serve the cake. I've seen too many project go south while the investors walk away with the project and the borrower is let sitting on the curb with cake smeared all over his face. It's a total control issue...

My second concern is IF your plans are within your personal skill set. Real estate deals and projects are a series of road blocks, and people in power saying no -- usually on a daily, or more, often basis. It's a learning curve that has to be honored. If you haven't been there and done this before, the odds are against you. I like to limit my exposure by starting small when taking new directions, and then dove-tailing on skills that I already have. I try to find things similar to my past successes and put a new twist on them.

And those two concerns are just for starters. There are several major ruts and stumbling blocks in the road you are planning to take. But, what I know after 40+ years...

 

[Get Right]

Thanks for the great answers.

Yes, the big builders go to great lengths to keep everything in house. Their own sales teams that are top notch - but very limited in what they do. They only know their products.

Do you think having me in the office to help the buyers needing to sell their own homes would be an added bonus in *your* market appeal? Or do most buyers have that wrapped up by the time they talk to you?

I think you would have to test this to get an accurate answer. Maybe find a builder that will let you try it on one. If it works, I see a nice business model that you could wrap around this. Good luck!

 

[Get Right]

Are your profit margins increasing with each spec?
With 2 project managers, how many hours are you putting in a week now? At what point did you feel the need to hire one?
Would you have any building tips/tricks to keep the build cost low?
Are you using the PM software's templates, or have you built a custom setup?

Yes, margins are increasing. My first house was 7%, the last one was 13%. I'm still trying to hit that magic 20% but it is hard.

I still work 60+ hours but it's fun so I don't mind for now. I hired my first PM when I started missing things I normally catch.

Owning your own equipment is a big money saver/maker for me.

I made a template based off a previous job. I tweak it each project and that becomes the new template.

 

[Raoul Duke]

 

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[Johnny Le]

I stumbled back on this post after reading it several years ago. I was at the Summit when you spoke about this business and although I was investing in real estate at the time, I never thought this would be a part of my future plans. As it turns out, it was.

My wife and I started with land prospecting and ended up becoming home builders. We took on a partner (50/50) who had construction expertise and we financed the deals. I think our market conditions are/were very different compared to what you're experiencing.

The handful of homes we've built have been estate-style homes on 1ac+ lots. Our margins have consistently been at or above 20% even through the trials of the Covid supply chain issues. Our most recent build is at 22% and we're disappointed with that. Having said that, we are in a 50/50 partnership so my wife and I take home 10%+. We shouldn't complain though, it's not bad money considering it's largely passive for us outside of the funding stresses.

Since we started, we've intentionally kept our volume low as we've learned the business. This was to mitigate the downside risk and, frankly, because it's such a cash intensive business and we own a number of rental properties already, we were somewhat over leveraged in our own minds.

Right now our homes are selling for $1.2M+ and that's in a depressed market. When the market rebounds we hope to be closer to the $1.4 - 1.6M range. We have one vacant lot left to build on, then we're out of inventory. With interest rates on the rise and land prices sky rocketing, we need to figure out how we can grow this business more effectively and increase our margins. I'm considering exploring higher density starter homes to help maximize the lot profitability and leverage economies of scale. It's not as sexy as estate homes, but it's a needed segment in the market. I'm not (yet) convinced it can be as profitable, but I have more research to do.

I'm also wondering if starting/buying other existing businesses, like HVAC and plumbing, could make sense to become more vertically integrated.

Thanks for all the unexpected and transparent inspiration along the way!

Wow. Just got a notification from this thread!! Thanks for everything @Get Right!!

It's been five years since my journey began and I've been able to build 10 spec homes since. From finding financing to building it to selling it.

In my market I was building in the upper price range, but have since considered to begin building higher density homes. In order to do so, we've spent a good bit on consultants.

If you want more information I'd recommend Builder Partnerships. (I have no affiliation with them!)

Best of luck!

 

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[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

 

[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.

 

[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.

 

[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?

 

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[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.

 

[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

 

[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.

 

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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

 

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[iAmTrade]

Very interesting project you are undertaking. I do like the home design. I do have prior construction experience, (In New Jersey).

What if I said...I knew a company that can build modular homes for you...

Your @Get Right selling point is- there is a demand for the homes, hence you will supply. How about.... supplying it cheaply, at great quality, impeccably efficient, possible to have it off the grid, self sustainable, VERY VISUALLY APPEALING.

Cash flowing with what I have in mind is to be your new focus. As you won't want to sell.

I have wanted to do this a few years now. 1 problem for myself was- I did not, and still do not have the capital to buy the land to make it worth the venture, nor do I have the capital to finance.

You are to spend 1.03 Million to build these... 3 Homes!?!

How about change that figure. Take the 342K$ for 1 of your homes and build 8 of them instead?

You are looking to profit at 172K$? or 104$? per home after you sell...

What if I said you can have yourself 105,600$ profit per year instead?
---
If you want to "go big" and spend your 1.03 Million$...

Change it, message me @Get Right

And instead of building 3 homes, you can get 24 at around $320,000.00 a year cash flow.

It doesn't hurt to just talk. Will wait for your message. I do love this, let me say that for certain.

 

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[Get Right]

Thanks iamtrade. I am working this market first, maybe mods in the future if Florida relaxes its regulations.