I broke ground last week, it’s a spec house in a resort community of second homes, and today I signed a listing agreement with my agent. I’ve a highly detailed set of plans and specs, which include schedules for everything in it down to the last cabinet knob. Everything is bid or costed, so I know where I am going to land, dollarwise. I have a good contingency built into my cost model, and the price is fairly set, with enough wiggle room.
I am new to the spec house biz. In this market, everything built on spec for the past few years was sold well before completion, some of them before the foundations got capped.
Whether it’s cash or a financed deal, if the sale occurs before completion, it will take the form of a contract for construction, I am certain. If you have made deals like this, tell me about them.
Replies
Mr. Micro:
I build (and have built for almost 30 yrs) specs in Houston. I build customs too, price range average from 1-1.5 million. I am fed up with customs. Too much stress. I've built about 200 new homes in my life and I am worn out. I recently sold a spec about halfway thru construction, we close this week, probably one of my more trying deals. House turned out beautiful, but again, too much stress. Next block I have a 1.6 million spec and I didn't put it up for sale until completion! I didn't want to have to deal with a buyer.
Of course flip side is building them, sitting on them, paying carrying costs, losing your shirt. I've done that too.
My advice on selling spec's before they are finished is this: if they are going to customize YOUR house, get some serious NON-REFUNDABLE earnest money, paid to you, not some title company or escrow account. Always ask yourself; what happens if the buyer ever walks the deal, where will I be then.
Allan
I don't see how a buyer can "buy" and then back out. What I see happening here, is realtors lining up buyers for "new construction" listings . . . a.k.a. spec houses . . . and offers are confirmed with contracts that promise a closing using a construction contract, with draws specified. Some might close with enclosure completed and half the mechanicals roughed in, others might close when wall finish is mostly done.
How do you have a buyer step up to the plate and then walk on you, having caused changes?
I'm assuming if you are building spec you have title to the property. At frame stage the buyer writes a contract, puts up 20K with a title company in escrow. They start customizing YOUR house, then something happens where they can't/won't close. Maybe you can sue for specific performance maybe you can't, maybe you can keep their earnest money maybe you can't, or maybe it just sits in limbo. Generally title companies require both parties to sign releases in order for you to get the earnest moeny. It can get messy. You are on the line for the loan. Best way is for them to give you enough cash specified as NON-REFUNDABLE.
I am closing one this week that went into contract 6 months ago, buyer has made 4 payments to me of 50K each. I sleep pretty good at night knowing they will not walk.
I am not saying buyers flake out on contracts that often, but it can happen. If a house is 100% complete I will take a contract with minimal earnest money to the title company, because I know they have to close in 4 weeks, house is finished, not too much can go wrong.
What is on the table here as an "offer for sale" is a specific house on a specific piece of property. The only reason a buyer would buy it in the not-yet-finished state is fear of losing the opportunity to someone else.
So wouldn't we then, me as builder and them as buyer, execute a construction contract? Where I lose it is where and when title to the property changes hands.
How do things go when a builder owns "build to suit" lots and a buyer steps up to the plate and makes a deal for the builder to build a house on one of the lots?
We will probably be dealing with an escrow agent. How does that work?
Micro, as has been pointed out, selling a spec prior to completion can be a mixed bag. All of a sudden you're dealing with a retail customer. I build specs in a resort community. I know that the house will sell within a few weeks of completion as a worst case scenario. Local realtors here have a problem showing a home that isn't complete, it's a local thing that I haven't encountered elsewhere. I will still list a home as soon as it's weathered in though. Some times we put up our own signs and a take one box with flyers and try to sell them ourselves prior to listing. Realize that as soon as your own sign, or a realtors goes up, you'll have a lot more traffic through your job site. That's good and bad. If you have presentable workers and subs, and keep a clean work place it's probably not a bad thing. A lot of people don't know what they're looking at. I instruct workers and subs to be polite but to not give out any information.
We are always clear if it sells prior to completion that it's a matter of picking carpet and counter/tile colors and a few fixtures only. We order cabinets and such prior to a house even being started and have a steady stream of materials scheduled for arrival at each job site. If they want more changes we'll talk about building them a custom. We know the plans we build, and the framers are very aware of which dimensions are critical. We also have a few planned fillers in the kitchen to allow for some variance. We use the same floor covering and tile place all of the time. They stock the colors we normally use, and we schedule them well in advance.
It sounds like you're in a strong market. There shouldn't be a need to bend a lot to suit a potential buyers whims and desires. If you do, you may want to consider getting payment for all upgrades up front, and make it non refundable if the sale doesn't close. Their tastes aren't the same as everyone else's, and you don't want to eat a bunch of upgrades that the rest of the market isn't willing to pay for if the sale doesn't close.
Also, depending on what the sales tax situation is where you're at, in many places, once a spec becomes sold during construction, it becomes a custom and the labor and material from that point forward are taxable to the buyer. Where I'm at we pay sales tax on materials for specs anyway, but not on labor, unless it's a custom, in which case the buyers pays it on materials and labor.
My recommendation would be to build a house that the market wants, and if it sells prior to completion, or there is interest, limit the changes that can be made. You'll know that the house will sell quickly anyway. Take some good digital pictures of one of you're completed specs, get some good photo paper and print up a nice portfolio. Show that to interested buyers so that they can see how nice one of your completed homes is, just like you build them. The pictures will probably look a lot better than where they're currently living, and it may get them under the "gas" enough to not worry about a bunch of changes.
Good luck to you.
Have you ever read Boss Hogs, spec house from hell thread?
Hope yours goes much more smoothly then his.
Never be afraid to try something new. Remember, amateurs built the ark, Professional build the Titanic.