Increased profits. The major reason to build a mix of custom and spec homes is to increase profits, but the percentage of profit on a spec home is often less than on a custom one. The payoff comes primarily from increasing your production while keeping overhead stable. You can do that by using specs to smooth your production schedule and by decreasing turnover time between homes.
In the scenario shown in the spreadsheet at left, the builder begins by building eight pre-sold homes a year. In scenario one, he also builds one spec house at a time. When the spec house is sold, he begins work on another. In the first scenario, he allows eight weeks to elapse before starting the next home. In scenario two he reduces that lag time to two weeks. And in scenario three, he increases his spec house production to include two ongoing spec homes while also decreasing lag time.
Notice that in this example, his production goes up from 9.26 homes per year to 11.43 homes, an increase of 2.17 homes. At the same time, the builder’s net profits increase from $120,000 to $185,000, an increase of 53%.
Fewer headaches. Building a spec home is usually easier than building a custom home. You can make selections ahead of time with no client hassle or hand-holding. In addition, you can build the same spec house several times in a row, and thus lessen the learning curve. By making fewer mistakes, you tend to increase your profits.
Better scheduling. The scheduling of a spec house can be more flexible. Whenever you find your crews or subs idle, you can shift them to the spec to increase productivity.
A new client base. When you add spec homes to your portfolio, you can appeal to a wider client base. Many people are afraid of the custom building process—they aren’t willing to wait or make all the necessary decisions, or they’re afraid of not knowing what the house will look like when it’s finished. They prefer to buy a home that’s already been built. These clients will introduce you to their real estate agents, who may also be able to refer you to additional custom clients.
A model home. One of the problems of being a custom builder is that you often don’t have a model home you can show prospective buyers. But a spec home can function as an inexpensive model home to showcase your craftsmanship and expose you to a larger number of prospects—at least until the new buyers move in.
Should Barry try mixing spec and custom? In the long run, that depends on Barry and his personality. But for many custom builders, it’s an excellent way to increase production, sales, and profits while still staying sane.
Al Trellis, a co-founder of Home Builders Network, has more than 25 years of experience as a custom builder, speaker, and consultant. He can be reached at altrellis@hbnnet.com.
