i would appreciate input from the great minds here in this fine forum if any of you have ever lost money on a spec house, and what not to do. i know that land & labor costs are different throughout the country, but i think that materials are relatively close. i’m also sure that demand and values vary, so selling price also fluctuates. in my opinion a well thought out spec house in an area of at least some demand for housing cannot lose money unless a disaster occurs. now you may have worked many long hard hours for not much money but is that a loss? i do almost all my own work, i am better at some things than others, but do everything reasonably well. if you don’t pay to much for the lot, build a design that fits the neighborhood and market, (and the market doesn’t crash) and you supply all of the labor can you lose? My answer to this question is no, i may be working cheap, but i won’t lose money. I may also make more than if i did a straight bid. if i take a contract to remodel a house for 50,000 and that adds 75,000 to the value of the house have i not made 25,000 for the owner? would i not be better off buying the fixer, financing the remodel, and reselling. the financing costs cut into the 25,000 but eliminating the bid process (many bids for each job you actually get = at least some work you don’t get paid for). also eliminates dealing with the customer. for me the autonomy is worth the risk. is this a mistake? i am just starting as a contractor after 25 years at various trades. i take a lot of pride in my work, turn out a good product but know little of business and would appreciate direction/advice. i’m already taking classes at local junior college but expect to learn more here.
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Bosshog will be along shortly and to crush any ambition and dreams you may have lol
Search Spec house from hell and read about his experience.
Never be afraid to try something new. Remember, amateurs built the ark, Professionals build the Titanic.
wow ya that is a nightmare, but no offense intended i did say well thought out, and to start something like that in winter where it actually snows, i think that was the biggest problem. i understand he was trying to employ himself when he was usually slow but. also i have already built a house and it turned out fine. my own design, simple but nice. it took about twice as long as i thought it would but cost less than i thought, probably because i did everything. i was hoping for a little more input, it is time to make a decision.
Yes, it is possible to make money on a spec project. At least half of this possibility is determined by the market you are building in. If that market is strong, your property will appreciate whether you do any work on it or not. If the market is weak, you can end up working for free. It is true that you won't lose cash if you put enough free labor into the job but why would you want to do that. You are the one who thinks that the homeowner is gaining a premium over the cost of work on his house. That premium is over and above the costs of the work including labor. If the homeowner gets a premium it is because the market is strong or he made a good decision about what the house needed to appreciate in value. Unless you understand this, don't consider a spec project. You can do a lot better with a lot less risk working for others, either as an employee or contractor. We have built any number of houses which could not have sold for 10-20% less than they cost to build. This had nothing to do with the cost and quality of the house and everything to do with the local real estate market. In almost all cases, the owners didn't care; they just wanted to live in the house. If they had needed to sell they would have eaten a loss.
thank you, an excellent answer, brief and to the point, of my question. what i hear you saying is that unless the market in my area is just right, i am better off working for wages. this is the decision i am now trying to make, is now the time. as to the what ifs by a previous poster, that is my dilemna, i'm trying to figure out what to do. most in here i think do excellent work and are proud craftsmen. i count myself in this group but i want to make more money if i can, i love the work, but i want to be a good businessman as well, so appreciate all the advice. i can do small remodel jobs, i can build whole houses and many scenarios in between. what is the best direction? what keeps me doing what i love (building) and minimizes the headaches, running a business efficiently. where is the blueprint for this? give it to me and let me build it!
skids.. it's very easy to lose money in spec building..
if you spend 6 months building.. and you can't sell the house, your income is zero.. so you have 6 months with no income
if you start building and you let your ego get involved, you may upgrade the design, upgrade the materials, spend more time on detailing.. all lead to the same end... more money in the product than the market is willing to pay..
what makes you think you are immune to the laws of supply and demand, profit and loss, and buy low , sell high..
in a hot market, any fool can make money... usually the more unscrupulous will make more money.. but watch out... housing markets can turn on a dime.. a hot market today can be ice cold in 6 months.. and you may sit on your spec for 6 to 10 years before the market returns to bail you out... most of us cannot outlast a market downturn...
no problem if you are Owner-occupied and you can live in your investment.. but a big problem if you are paying the interest on a construction loan and you have no other source of income...
me.. i made a deal in the mid-70's... no more spec for me.. if someone would just keep the economy moving... i've held up my end ever since...
Mike Smith Rhode Island : Design / Build / Repair / Restore
thank you for the response mike, i live in an area of expensive real estate and rule #1 is not to overextend yourself. my plan is to build simple yet nice, and after house is complete can i not refinance and rent? i would probably have a slight negative cash flow untill market turns back up and if i have to sell cheap i worked cheap. the plan is to stay in the game for the long haul, eventually i hope to be in a position to take advantage of a hot market. is what you do all for customers only? what does it cost you to build a simple 1800-2000 sq ft home? what are lot prices and built houses selling for in your area? i see what you mean about overbuilding, no ego here! in my area nice customs on 1/2 acre lots are listing for $750,000 but not moving, mcmansions are a mil and up, not moving. anything $400,000 is selling quick, and just under $200,000 for a 1/2 acre lot in new subdivision with sewer and utilities. i don't think i'm immune to supply and demand, thats why i'm trying to do my homework.
Rather than build a spec house, I would suggest that you go into business for yourself as a builder/remodeler. There is plenty to learn about running this business without also having to learn about the real estate market. You can even begin this business with side jobs if you have the physical stamina. This will give you a safety net if things don't go according to plan. (They often don't.)
Of course I'm not following my own advice about specs as I am currently restoring a 5500 sf Adirondack "camp". I have a neighbor who attempted a similar project and has been foreclosed by the bank. I have not borrowed any money and have been using this spec as a side job and a time filler when things are slow. If the market stays hot I will do well. If not, I will still do better than paying my wage. At least that is my expectation.
i saw something in another thread that villagehandyman posted about talking with a competitor and agreeing to raise their prices. someone else commented about price fixing or gouging. i was thinking more along the lines of organizing, kinda like what the unions once did to raise wages. are we not making money for homeowners by increasing their propertys value more than we charge to do the work? what does everyone here think of unions and why? i've noticed in two different areas of california non union wages are different, while prices of lots, and prices of finished homes are comparable. where does the extra money that is not paid for labor go? contractor? developer? do you want me to compete with and undercut the prices of other contractors in california or try to finance my own work and make what the market will bear? it is an ethical question as much as a business question. how would you feel if a new to your area contractor started doing excellent work for less than what you are used to charging? what if they tryed to corner the market in your area and even though as they got bigger their quality declined somewhat they kept getting cheaper and cheaper and got more and more work?
I am unsure as to where we are going with all the hypothetical questions. Read Michael Stones book on running a contracting business. Read the business archives here and at JLC. Most of the questions you are asking are already answered there.
I have no problem answering questions if they are of a "true" nature but its difficult to come up with complete answers for questions of the "what if" catagory as there is no end to the what if.
Example, what if someone came in and did excellent work for less? I assume I might lose some business. But frankly in my area there is enough to go around so I doubt my customers would all know about you. Nor do I think all of your customers would know about me. And if they did would my customers like you? Trust you? I don't know, to many what ifs.
What if someone got bigger and there quality declined. Happens all the time, get bigger and we'll talk about it. Just my thoughts. DanT
There are a million things that can go wrong, a few thousand that need to go right. You figure the odds.
I have thought of spec building as a way to get into custom home building for years. But every time I price one out, even if I am optimistic on the selling price, with costs being known, It seems I would be better off to stop turning down the handyman size remodeling jobs.
Because it seems so "easy" to build a spec, and people are so willing to donate their time because its "free", I think it would be extremely difficult to realize any return on your money or even your time, at least in my area. That's if nothing catastrophic goes wrong ie. the risk component. I can give you a partial list of those types of things.
I can't think of any ongoing spec builders in my area who aren't subsidizing their spec operation with at least one of the following activities:
Custom Home Building
Land Development
Remodeling
Commercial Construction
Rental Properties
Residential Warranties
Lack of quality in construction and design.
Why would you want to do this as source of income, and work for free at the same time? Unfortunately, people with the same motivations and subsidies have made the spec market tough. If you are going to spec houses, you should probably be one of the most knowledgeable people in your area with respect to real estate in general.
Tom
thank you Tom, what i hear you saying is don't put all your eggs in one basket. i will take that advice. i have always made money for the contractors i have worked for, often times despite the contractors, i don't mind working hard, but i hate working stupid. the pro of spec is no bid and no customer, the con is i may work very cheap for a year, and then go back to work for wages. one of the first contractors i ever worked for got a deal some years ago to build 20 houses. his family and friends put up the money. he got no wages for this project, 1 house, and 1/3 profits. the timing was perfect, the market took off right after they were done, he no longer works as a GC, he is now a consultant to developers. this is in the neighborhood i grew up in, my parents bought a house there in 72 for $27,500. i think it was 87 when the first phase of the development went for sale at around $400,000. i don't know what the land cost but i'm sure they made a lot of money. i was recently in the old neighborhood, a new development was going up 1/4 mile south. the billboard said from the low $900,000's. needless to say i can't afford to live in the neighborhood i grew up in. this is in southern santa barbara county where there was a building moratorium for years for lack of water. i think the aquaduct came in around 85 or so. i live in nor cal now.