Over the years I have run across custom builders who have decided to jump into building spec homes, usually for one of the following reasons:
- They are tired of dealing with customers.
- They are required to build a spec home by the developer of the community they’re building in.
They want to show off their abilities in a local parade of homes.A spec home can be a profitable venture if done correctly. However, many custom builders build a spec home that they like without taking into account what the market really wants, and they get stuck with the house and no buyer. Many parade homes that look great and even win awards sit on the market long after the parade is over.
When building a spec home the most important step is to do some market research before starting to build. If you are one of the custom builders currently sitting on a completed spec the following tips may help you to move that home:
- The house must be completely finished. Many builders wait to install flooring (and sometimes kitchen cabinets) so the customer can make choices. While giving the buyers choices is great in theory, it does not outweigh the negative impact of an incomplete home. Finish the home with neutral colors and materials. If a potential buyer wants to change out the carpet in the living room for hardwood, you can negotiate that as part of the purchase.
- Make it move-in ready. The house should be ready to hand over to the buyers the second they decide to purchase it. It should also be scrupulously clean, including the garage.
- Finish the landscaping. I realize that in many markets, homeowners prefer to install their own plants. And some builders don’t want to deal with warranty issues of lawns and landscaping. However, remember that standing inventory is just a resale that hasn’t been lived in. Resale homes have lawns and landscaping and, as a result, may show better than your spec. So, install the lawn and make the landscaping (including flowers) complete.
Marketing Matters. Effective marketing is the next step in converting your spec house into someone’s home. One advantage of resale houses is that they typically are furnished. When done correctly, a home staged with furniture helps buyers imagine themselves living there. Some builders partner with furniture stores to jointly market the home and the furniture. They even offer free decorating lessons to invited guests—at the spec home, of course. Often, the store provides the furniture at no cost or at greatly reduced fees in exchange for displaying it in a real home.
Other builders own furniture that they move from spec to spec or keep in storage for the houses that just won’t sell. Costing between $5,000 and $15,000 per home, this isn’t expensive, although I know some clever builders who have spent much less and still pulled off the desired result. And spending the money certainly beats having to lower the price by $25,000 or $50,000 to sell a house.
Promotional Materials. Most builders put together fact-based informational pieces that completely miss the marketing boat. Instead of a flyer that flatly states “Lot 17A, 2,952 sq. ft., Elevation C, $419,900, included and standard options are crown molding in dining room, living room, and foyer … $5,000 towards closing or options,” try a brochure that reads like this: “Ever dream of living on a golf course? Don’t miss your chance. Last new home backing to the course in the exclusive Evergreen Golf Course Community.” Include professional photographs showing the front of the home, the kitchen, and the view of the golf course from the master bedroom window. We helped a client develop such a brochure and posted it as a downloadable PDF on his Web site, distributed printed copies to the top 100 Realtors in the area, and had plenty more in the home for potential buyers to take. The home sold within six days of distributing the new flyer. I not only credit the flyer with creating a buzz in the market, but also with energizing the sales team as well.
Price It Right. If your balance sheet is straining with completed inventory, do whatever it takes to get rid of those homes. Realize that cash flow is more important than profit. The interest carry and maintenance costs will eat you alive.
As a last resort, meet with your controller or CFO to figure what the home is costing you and set a price to make it sell (even at a loss). My philosophy is to retreat, revamp your spec strategy, and live to fight another day.
Steve Maltzman, CPA, is president of SMA Consulting in Colton, Calif. He can be reached at smaltzman@smaconsulting.net.
