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Spec Homes Vs Custom

 
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Old 01-12-2012, 03:14 PM   #1
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Spec Homes Vs Custom


I'm in the planning phase of building a spec home and I was just wondering what the pros and cons of building on spec vs building customs are from those who've done both? I'm currently a sub contractor and my intent is to build one or two spec houses this year and possibly transition into the custom market in the future. First house will be built under the guise as an owner builder, and I very well may move in there until if I can't sell it quickly. It's my understanding that doing this too frequently will trigger the good ol' IRS to consider me a homebuilder instead of taxing me on capital gains. Does that sound about right? Anyone on here done this before?
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Old 01-12-2012, 07:11 PM   #2
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Re: Spec Homes Vs Custom


Building a spec house is just that...speculation. Maybe somebody will buy it, maybe they won't.
A true custom home is one that the buyer sits down with the architect and has a home designed to their specific tastes and to fit their specific building site. The hard work is done, all you have to do is build it

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Old 01-13-2012, 06:51 AM   #3
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Re: Spec Homes Vs Custom


I've done both. Early on I built some customs and did remodel (additions) and commercial remodel. The last custom/remodel ($1M+) almost killed me, not financially but dealing with the owners. Then I switched strictly to specs, even turned down customs.

Custom homes are stressful. This is the biggest thing your customer will ever do. They are intense about the job, they watch everything, and expect you to hold their hand constantly. You, on the other hand, want to have some kind of life outside your job. Oftentimes they come up with (some really dumb) ideas mid-build and expect you to adjust immediately. They don't recognize the cost of constant rescheduling.

Specs are easy. Get the design done completely, then build exactly that design. NO CHANGES. The money is better, the stress is much less. Of course you still have to sell that house.

If you need to finance the project, in this market spec financing will be tough. You will spend quite a bit of time arranging the financing then more time getting your draws. You've got to figure that time as part of the project cost. On the other hand, if you can finance it yourself, you're saving time/money.
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Old 01-13-2012, 07:37 AM   #4
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Re: Spec Homes Vs Custom


If I had my may, it would be nothing but spec houses. So much easier, you take a key compnent out of the mix.....the stress of the H.O. Some folks look at it as a small amount of risk because you don't have a buyer yet, but it should sell easy if it's priced right.
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Old 01-13-2012, 09:29 AM   #5
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Re: Spec Homes Vs Custom


Thanks guys. I often wondered if the fact you're dealing with other peoples money outweighed the hassle of dealing with other people. When you build a spec, do you generally just sub everything out like you would your customs or do you have more of a hands on? What about purchasing materials? Do you shop around at all or just let the subs handle all of that as well? What's the longest you've had a spec sitting on the market for? Thanks!
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Old 01-14-2012, 12:11 AM   #6
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Re: Spec Homes Vs Custom


We do all the carpentry trades, but use subs for the rest.The last 3 homes to sell in the sub division we are building in were 16 days, 42 days and 47 days. Finding good deals on materials is just helping you save. If we sub out somethings like trim I have a hook up for that and can save 500 a house at least. Realtors often have charts and graphs to look at with all kinds of goodies.
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Old 01-17-2012, 10:29 PM   #7
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Re: Spec Homes Vs Custom


What the heck is a spec?

j/k but no one is building any in Michigan.... we are loosing people and are overbuilt. I wish i worked on specs I had a phone call Friday night at 9:20pm from a homeowner saying that they didn't like the color caulk I used. I got a little rude with them saying that it could have waited till the next day. Egh I'm still mad about it. They were good clients too, right at the final stretch of a kitchen remodel. Too bad it went down that way.
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Old 01-17-2012, 11:23 PM   #8
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Re: Spec Homes Vs Custom


I believe your IRS tax trigger is 2 years. So if a buyer comes along, you'll figure your tax liability vs. your price/profit.

I've done spec and custom and like others have said, specs are easy - you have your design, material selections, and all the questions and chioces that come up are yours to determine. There may well be wrinkles but you are in control. With Customs, you have a whole other layer of management and responsiblity to your client. Its just a tougher job to control.

The longest sitting spec? 3 years. I haven't done a spec since.
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Old 01-25-2012, 02:08 PM   #9
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Re: Spec Homes Vs Custom


A local HO recently decided to tear down his existing $1m property to the basement and agreed to a $1.5m rebuild. Not disimilar to building a new custom. At this point in time, the total price is approaching $2m with all of the changes, upgrades, etc. I imagine the builder is under a tremendous amount of pressure as is the owner who thought changes and upgrades should be included in the original price.

Builder also screwed up the financials which leaves both parties pointing the finger at each other. One big hellacious mess...

Specs, on the other hand can be just as problematic and risky. As some have pointed out, if no one buys, the spec builder is left holding the bag, and the mortgage, etc. Better have alot of extra cash on hand in that case.
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Old 01-29-2012, 12:27 AM   #10
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Re: Spec Homes Vs Custom


I agree with those who say specs are easier. I've built lots of specs and when there is no emotion in the deal, you can make decisions quickly and keep the project rolling.

Dealing with people who have never built a house is too hard, especially when a husband and wife can't even agree, or they have no vision or sense of space.

But there is a risk, and we got stuck wit the last two houses about the time the market tanked. They're rentals now.

When spec money comes back, so will I. Specs are definitely the way to go.
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Old 02-05-2012, 01:04 AM   #11
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Re: Spec Homes Vs Custom


Quote:
Originally Posted by BattleRidge View Post
We do all the carpentry trades, but use subs for the rest.The last 3 homes to sell in the sub division we are building in were 16 days, 42 days and 47 days. Finding good deals on materials is just helping you save. If we sub out somethings like trim I have a hook up for that and can save 500 a house at least. Realtors often have charts and graphs to look at with all kinds of goodies.
Do you use realtors to sell your specs? Maybe I'm naive but I hate the idea of giving away 7% of the gross price to someone to list and show a house. Won't that eat up around a quarter of your profits?

Also, have you ever did any labor trading with other trade guys that build specs on the side too? I'm not sure if it would fly in my market, especially being a "specialty" trade (according to contractortalk anyway), but I would think that would be one avenue to cutting construction costs. How proactive are you about shopping around for material? I'm thinking this is something my wife would excel at, as long as she doesn't have the checkbook with her at the same time I know labor only contracts with subs aren't all that common but with the market the way it is, I would think I could find some that would do it.
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Old 02-05-2012, 01:15 AM   #12
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Re: Spec Homes Vs Custom


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Originally Posted by Hmbldr View Post
I believe your IRS tax trigger is 2 years. So if a buyer comes along, you'll figure your tax liability vs. your price/profit.

I've done spec and custom and like others have said, specs are easy - you have your design, material selections, and all the questions and chioces that come up are yours to determine. There may well be wrinkles but you are in control. With Customs, you have a whole other layer of management and responsiblity to your client. Its just a tougher job to control.

The longest sitting spec? 3 years. I haven't done a spec since.
Ouch. 3 years is a long time. I guess my plan is pretty simple. Build house, and if need be, live in house until it sells. Repeat until I can cash flow the construction process on my own. Not really worried about other living expenses and we're ok with living like gypsy's if it means that much more financial flexibilty down the road. Based on the responses here, specs are the way to go as I thought they would be, so I probably won't venture in the custom market anytime soon.

I should probably be asking a CPA, but hypothetically speaking, if I built my own home and sold it in within the 2 year window, I would be taxed on capital gains rather income right? Wonder how many times I could get away with that? Not that I don't like paying taxes or anything...
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Old 02-05-2012, 01:20 AM   #13
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Re: Spec Homes Vs Custom


It don't get no better when you build a custom for people that know what they want & know what it costs.

Cool chit when money ain't in the picture....
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Old 02-05-2012, 10:44 AM   #14
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Re: Spec Homes Vs Custom


Quote:
Originally Posted by NEFoamer View Post
I should probably be asking a CPA, but hypothetically speaking, if I built my own home and sold it in within the 2 year window, I would be taxed on capital gains rather income right? Wonder how many times I could get away with that? Not that I don't like paying taxes or anything...
You can do it as many times as you want, it just means more $$ for them. If it were me I'd set up a seperate LLC and have that LLC build the home.
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Old 02-05-2012, 12:29 PM   #15
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Re: Spec Homes Vs Custom


The definition of "spec" is it is not designed for an individual. If you designed and built a house for yourself that you moved into and lived in for 2 years, it would be a custom. A custom is only a custom for the person who had it built, when he sells it, it is no longer a custom.

There is noting wrong with building a house, living in it two years, selling it, and doing it again. That would allow you to avoid taxes on your earnings on that house. It is perfectly legal. If you don't mind moving every two years, go for it. Of course there are the costs of moving, both financial and personal. I wouldn't do it because I like where I live, I don't like to move.

I own 15 rentals that I built. The law would allow me to move in to one, live in it two years, then sell it with all earnings staying in my pocket, then repeat and repeat. I won't do it though it would be financially beneficial because I don't want to live that way.
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Old 02-24-2012, 05:33 PM   #16
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Re: Spec Homes Vs Custom


The last spec house i sold was in 2008 and we had to count it as business income, not a capital gain. If you have a contracting business that's the way you have to legally file the income. It's a downer cause capital gains tax is only 15percent on realistate but business income... well you know it's more. If you could live there two years then yes, tax free. Remember with a spec, you pay the utilities, taxes, and interest. Plus we have to have a seperate home owners insurance along with our business liability and comp. for the spec.
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Old 02-24-2012, 06:52 PM   #17
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Re: Spec Homes Vs Custom


Quote:
Originally Posted by NEFoamer View Post
I'm in the planning phase of building a spec home and I was just wondering what the pros and cons of building on spec vs building customs are from those who've done both? I'm currently a sub contractor and my intent is to build one or two spec houses this year and possibly transition into the custom market in the future. First house will be built under the guise as an owner builder, and I very well may move in there until if I can't sell it quickly. It's my understanding that doing this too frequently will trigger the good ol' IRS to consider me a homebuilder instead of taxing me on capital gains. Does that sound about right? Anyone on here done this before?
I havent read anyone elses post but in my opinion I would build a spec home. Less to deal with customers, unless of course its very profitable. Like 30% profitable. Custom homes means custom headaches
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Old 02-25-2012, 07:01 AM   #18
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Re: Spec Homes Vs Custom


I talked to a guy that runs a local small loan place, he used to do mortgage lending. Now he just makes car loans, and personal loans, but depending on the relationship some larger loans. He got out of the mortgage due to all the paperwork several years ago. He couldn't carry the loans and sold them all. But he said that lately the banks aren't writing anything to people that need loans, he said the people that don't have to borrow can get all they want and pay nothing for it.

I talked to him about my building plans next year and he suggested if my specs were sitting to long to do an owner finance. He said he knew many good people that could pay for a home but can't qualify the way the market and fears are today. He said it might get even worse.

It wouldn't kill me to hold a note on one to start with. I was looking at nothing over 10 years. The payment might be a bit tough on some but they would be out of it sooner, thats better for them. With a decent downpayment I could cover the lot and some of the materials with that. I would really be financing my labor and profit for the customer. And if they can't pull it of then I sell it again or make it a rental.

Does this usually end up going bad, for both parties. I'm not building anything over $100,000 around here for along time. So my exposure isn't that big to start with. I am real conservative, OK I'm down right tight.
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Old 02-28-2012, 08:51 PM   #19
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Re: Spec Homes Vs Custom


Built my first Spec going on 7 years now. A wife and three kids later and guess what, I'm still here.... They're right when they say plans change. Plan originally was to spec and turn one every two-three years.
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Old 03-13-2012, 03:31 PM   #20
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Re: Spec Homes Vs Custom


Most of my experience has been on large custom homes. The clients will drive you absolutely insane during the process. You end up being a part of their family, so you better hope they are good people. The benefits of a spec are enormous, you can make any decision you want in a speedy way, I can't count the number of times a problem would arise on the job site and we would have to sit idle until the Architect and Client came up with a solution that was suitable to them. We would often come to the same conclusion in about 10 minutes, but would have to wait hours if not days to get proper clearance to start building again.

Yes, it is great that it is their money, but then you have to factor in the time involved in compiling RFI's and Change Orders, plus lots and LOTS of meetings.

My last bid, the client asked if we could build his custom home for cheaper if it was a spec house. I had to bite my tongue so I didn't say, "We can, but you need to fire your architect and never talk to me, but just write checks for the next 18 months."

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