Home buyers across the country are scrambling for properties, and real estate professionals are begging for more houses to be built to answer the high demand.
Under these conditions, you might suspect that developers would be more inclined to build a house even before a buyer has purchased it.
Indeed, some builders have increased their production of “speculative” or “spec” houses, which are fully or partially built without a purchase contract in place. Still, that’s not the case with others — the strategy around spec houses varies according to market conditions and builder preferences.
“A few years ago, it was too risky for builders to build spec houses, but right now, builders are extremely bullish on the housing market,” says Tim Costello, founder and chief executive of Builder Homesite Inc., the parent company of Builders Digital Experience and NewHomeSource.com, a builder-marketing business based in Austin. “They’re selling everything they can build and making lots of money, so their risk profile has changed.”
In different market cycles, spec homes — which are sometimes labeled “immediate delivery,” “move-in ready” or “immediate occupancy” houses — can be a burden on builders if they languish on the market, because they’ve paid to construct the house and continue to pay financing costs and utilities. When builders are eager to sell a spec house, buyers occasionally get a bargain.
But in today’s hot housing market, this is rarely the case, with most houses selling fast.
“Right now, we’re seeing most of the builders in our area building houses as fast as the lots are developed,” said Lind Goodman, a sales manager for BSI Builder Services, a division of the Allen Tate Co. in Charlotte. “Resale inventory is so low, and builders can’t build houses as fast as they are selling, particularly at the lower-end prices.”
Home buyers in a hurry to move are the most likely candidates for a spec house, but sometimes spec buyers are simply tired of competing for limited resale houses in their area.
“Buyers who choose spec houses today are usually doing this because of timing,” Goodman said. “Sometimes they are relocating and want to move to their permanent home right away. Sometimes people put their house on the market, and it sells faster than they expected. They only want to move once rather than go into temporary housing while they wait for a house to be built.”
Although choosing personalized features is a pleasure for many buyers of new construction, Goodman said: “Lots of people like not having to pick everything, and they’re happy to go with the choices the builder has made for their house. They’re still getting a new house, and typically it has the most popular upgrades for that price and neighborhood.”
Regina and Ted Solomon and their three children, ages 10, 13 and 15, recently moved into a spec house at Meadowbrook Farm in Leesburg that was built by Van Metre Homes. They opted for a spec house because of its lot and location within the community. The Solomons, who’d already lived in the area, looked at resale houses two years ago and hadn’t found anything they liked. This time, Regina Solomon found a house when they weren’t seriously looking.
“I popped into Meadowbrook Farm on a whim and was immediately attracted to the house, and especially the lot, which is next to a common area where the kids can play,” Regina Solomon said. “If the house hadn’t been ready, I might not have been as willing to make a quick decision.”
She said she saw the house on a Tuesday, brought her family and bought it the following Saturday.
“The house just matched everything we wanted,” she said. “They did a great job putting in the finishes I would have chosen anyway. I actually think they chose a higher quality of items than I might have picked if I had to sit and choose everything with a price list in front of me.”
Van Metre Homes, a Northern Virginia builder, has increased the number of spec houses it builds in response to the critical need for houses in Loudoun and Fairfax counties, said Brian Davidson, group president for the firm’s new homes division in Broadlands, Va.
“Building more spec homes allows us to reach people who would be looking at resales because they want to move quickly rather than wait six months or longer for a home to be built,” Davidson said. “We particularly want to have houses ready for the busy spring housing market and the fall housing market.”
About 37 percent of Van Metre’s sales last year were move-in ready houses, compared with 31 percent in 2016.
Data from the U.S. Census Bureau show that about 35 percent of newly built homes sold in December were completed when they were purchased, an increase over the 33 percent sold in December 2016. However, the definition of a “spec house” varies.
“Some builders start homes by pouring the foundation and then build very slowly while waiting for a buyer,” Costello said. “A true spec home is one that is built and can be moved into tomorrow.”
The National Association of Home Builders (NAHB) in Washington tracks “spec houses” as all houses that are sold with the land and house, which includes homes under construction while under contract, as well as completed homes.
“The challenge for builders, even if they would like to build more spec homes, is that they face what we call the ‘five L’s’: labor, lots, lending, lumber and local regulations,” said Robert Dietz, the NAHB’s chief economist. “Labor costs are higher, and it can be harder to find enough skilled laborers. In addition, buildable lots are expensive, lending is tight, and lumber prices were up 30 percent in 2017 compared to 2016. Local regulatory costs for things like permits rose 29 percent between 2011 and 2016.”
Not all builders construct spec houses, Costello said, although some choose to do so for efficiency and to keep their crews working consistently.
“Some builders try to keep two or three spec houses available at all times to compete against the resale market,” Costello said. “Builders that offer customization build spec houses that can be personalized with the final finishes and then delivered in 60 days, as opposed to the six months that building a new home usually requires.”
Costello said a few builders, such as D.R. Horton Express, LGI Homes and Goodall Homes, consistently build spec houses as a business model.
“We try to start the same number of houses every week so we can communicate accurately to our customers when each house will be finished,” said Chris O’Neal, chief sales officer of Goodall Homes, which builds homes in the high-demand markets of Nashville and Knoxville, Tenn. “This even-flow process lets our trade partners and employees know that they will always have consistent work with us. That’s one reason we have been successful even in a tough labor market. We pay them weekly throughout the year.”
Finding enough lots to build on, particularly in Nashville, is the biggest challenge Goodall Homes faces, O’Neal said.
“We built spec houses right away in Knoxville when we expanded there, so we could show people the quality of our work in a market where we were unknown,” O’Neal said.
Goodall Homes builds spec houses for first-time buyers and move-up buyers, ranging from 1,500 to 4,000 square feet and priced from $250,000 to $500,000, O’Neal said.
Pulte Group, a national builder of brands including Pulte, Centex and Del Webb, typically builds about one spec house in each community, said Macey Kessler, spokeswoman for Pulte Group. Kessler said that in the fourth quarter of 2017, Pulte sold 637 finished spec homes in their 790 communities.
During Pulte Group’s most recent earnings call, Ryan Marshall, Pulte Group’s president and chief executive, said: “We’re not afraid to use spec. We’re using it in a way that I think smooths out our production pipeline. Beyond that, our view is our profitability on build-to-order units is quite a bit higher, and we eliminate the risk of potentially having a unit that we’ve got to hold on to and discount to sell or pay the carrying costs associated with carrying a finished house. So, it’s all worked into our model of driving the highest returns possible.”
Van Metre plans to continue to build spec houses at most of its communities, although Davidson said they will build fewer in communities where prices are in the $1 million and higher range. Not only are the costs to build those houses higher, but buyers in that price range tend to want to be able to customize their house.
“About 25 percent of our customers want immediate-delivery homes so they can move within 30 days,” Davidson said. “If we don’t have a house ready, they’ll buy a resale property.”
Although some spec houses are 100 percent complete, others offer a few options for personalization.
“We try to hold off on some finishes, such as the cabinets, flooring and appliances, as long as possible on our spec homes, but it can take four to six weeks for materials to arrive, so sometimes we need to finish a house before it’s purchased,” Davidson said. “But if buyers want something specific, like a porch or a deck, we can bring in our design-build division and remodel the house before they move in.”
Today, spec houses include more of the most desirable features rather than just the basics they did in the past, Goodman said, such as hardwood flooring on the first floor, stainless-steel appliances and tile flooring in the bathrooms.
“Builders run a report to see what the pre-construction buyers are choosing in each neighborhood,” Goodman said. “In one neighborhood, we put in a few too many upgrades, and those houses sat a little longer than we wanted, so for the next spec houses, we backed off a little on the options to make sure we met the price expectations of buyers.”
Builders need to predict what buyers want and how much they will spend on a spec house, rather than setting the base price and letting buyers choose how much they want to increase their budget with various levels of options.
“We work with our design team and design center to choose finishes and fixtures that are the most common choices of buyers,” O’Neal said. “Not only does that mean the house is more likely to be popular now, but that also means the odds are better that the buyers will be able to sell that house more easily in the future.”
For buyers frustrated by a lack of inventory or in a hurry to move before the school year starts, a new job begins or because they have sold their current home, a spec house can meet their needs. Buyers won’t find a bargain, but they could find a place that matches their taste and is move-in ready.
● A move-in date can be confirmed quickly, and sometimes moving can occur within 15 to 30 days.
● Buyers can lock in their interest rate rather than wait a few months to know what their payments will be.
● Completed houses are easier to see in person rather than having to visualize a house from a floor plan or a model.
● Some buyers find that having fewer choices for fixtures and finishes is less stressful than building a new house.
Cons of buying a spec home
● Buyers usually have little or no opportunity to personalize their choices for flooring, cabinets, lighting fixtures and appliances.
● Structural changes are particularly hard to add to a spec house.
● Buyers don’t have the option of choosing a lot and location within a community, because the house is already built.
● Spec houses are meant to be sold quickly, so buyers who want extra time to sell their current house could be at a disadvantage.