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Spec Homes Made Simple: How Contractors Actually Make Money · Contractor Business Builder Podcast

• 0:00
  Thinking about building a spec home?
• 0:02
  I've worked with construction companies doing well over $100
• 0:05
  million worth of spec homes per year.
• 0:08
  I've also watched friends of mine lose money because they
• 0:11
  built the wrong home for the wrong area.
• 0:13
  In this video, we're going to discover how much cash you
• 0:16
  actually need to build a spec home, where to build, or what to
• 0:20
  build to sell it fast so you don't waste your time building a
• 0:24
  house that nobody wants. And I'm also going to reveal the
• 0:27
  five biggest mistakes that can sync your project and exactly
• 0:32
  how to avoid them. So the first question that you
• 0:35
  should be asking yourself is, is this worth it and is it right
• 0:39
  for me? Spec homes can make you millions
• 0:41
  of dollars or it can bury you in debt.
• 0:44
  The difference really comes down to how you handle all the moving
• 0:47
  parts. The the thing with spec builds
• 0:49
  is there are a bunch of components that you will need to
• 0:53
  learn and get right that are not typically handled in a normal
• 0:58
  build when you're building a custom home for a client and
• 1:01
  something like that. So there's there's risks that
• 1:04
  are involved with market changes you expect build speculation.
• 1:09
  So there's just inherent risks to this type of a model.
• 1:12
  That said, you can provide a much more enjoyable building
• 1:17
  experience potentially because you aren't working with a
• 1:21
  specific client and you're able to just build the, the, the
• 1:26
  building that you want, the way that you want it, But you still
• 1:30
  have a client in mind. And getting that right is really
• 1:34
  something that's super important.
• 1:36
  And we're going to be getting to just a little bit later.
• 1:38
  And as I mentioned, there's a lot of moving parts.
• 1:40
  So you're gonna have to find land surveying, you've got to
• 1:43
  finance the deal. You're gonna have to deal with a
• 1:45
  bunch of different people like real estate agents, Realtors,
• 1:47
  designers and things like that. And, and really have a lot
• 1:51
  dialed in and able to enable you to be able to do this and profit
• 1:56
  from it. So the first kind of
• 1:58
  speculation, Bill, that I did investment, I was working with a
• 2:02
  partner and it did not go well. And I quickly realized that just
• 2:07
  because I could build houses and I've done a lot of construction
• 2:10
  work in the past didn't necessarily make me a good spec
• 2:13
  builder or a good real estate investor.
• 2:16
  And yes, I learned later on and things change, but realize when
• 2:20
  you're getting into it that there's going to be some blind
• 2:23
  spots, there's going to be some Gray areas, there's going to be
• 2:25
  a learning curve. And your first couple of builds
• 2:28
  are probably going to be your hardest and they could either
• 2:31
  make or break you. And as well, there's just a lot
• 2:35
  of different things. So how do I get rich is probably
• 2:39
  what you're asking. Like how do I make money at
• 2:41
  this? What I have seen in my
• 2:43
  experience is there's sort of two different types of spec
• 2:45
  builders. There's the low volume spec
• 2:48
  builders. These are usually kind of
• 2:51
  self-employed people look smaller builders and they're
• 2:54
  doing maybe a handful of spec homes a year.
• 2:57
  Really it provides them a nice income, but they're still very
• 3:01
  much involved with the business and it's more or less like a a
• 3:05
  regular builder type model. They're just building spec
• 3:08
  homes. The people that really make it
• 3:10
  are doing this in volume. They've got a system, they've
• 3:13
  got a process, they've got a team of people around them, and
• 3:17
  they really know their numbers well.
• 3:19
  Plus, if you're getting into this and you want to get rich at
• 3:22
  it, make sure you have contingencies in place so that
• 3:25
  you've got money to pull from. And that leads me into my next
• 3:28
  point. So you're determined this is
• 3:30
  something you want to do. Now you're asking how much?
• 3:32
  How much is this going to cost you?
• 3:34
  Most builders underestimate this by half.
• 3:36
  I'll show you why. Spec homes take twice the cash.
• 3:39
  You think our contractors can start with $0.00 using other
• 3:43
  people's money. So you may have heard of this
• 3:45
  before. If you're in the investing world
• 3:47
  using other people's money. OPM, what does this mean?
• 3:50
  This means that you're going to get financing, you're gonna
• 3:53
  create, have creative financing essentially maybe getting rates
• 3:58
  to use the land from the current owner, or you're going to be
• 4:02
  using some sort of collateral, maybe raising investments with
• 4:05
  other investors or private money lenders or hard money lenders.
• 4:09
  There's a number of different financing options.
• 4:11
  I'm not going to dive deep into all of this, but essentially you
• 4:15
  can either put up some of your own money and do more
• 4:17
  traditional bank type mortgage or you can go and find investors
• 4:22
  or hard money lenders to kind of finance the deal for you.
• 4:27
  Both of them work. I've seen both be successful.
• 4:29
  In my personal opinion, I would always want to make sure that
• 4:33
  I've got at least 20% of the final cost of the project of
• 4:39
  money available to me, typically my own money in the deal.
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  Now I know a lot of the gurus out there is like, don't put
• 4:46
  your own money in or just, you know, you can start with zero.
• 4:48
  You don't need anything. But I'm gonna get to that later
• 4:52
  as far as like the mistakes. And it can become a House of
• 4:55
  Cards and, and ruin you financially if anything goes
• 4:58
  wrong. And like I mentioned earlier,
• 4:59
  because this is your first time into it, you definitely want to
• 5:03
  be cautious. You want to have money available
• 5:06
  to you. And you do want to find someone
• 5:08
  or talk with someone who's done this before to really know the
• 5:12
  ins and outs and ideally mentor you in this process.
• 5:15
  So educate yourself on what is going to take and really know
• 5:19
  your numbers and get clear on how much money you have and need
• 5:24
  before jumping into it. So at this point you should be
• 5:28
  asking yourself what mistakes should I avoid?
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  As I've mentioned there's a number of pitfalls in building
• 5:34
  spec homes and it can become a host of cards when you are over
• 5:39
  extended in the debt or you've you've promised too much.
• 5:42
  I had this happen to myself where we were building our our
• 5:46
  first spec home. Overestimated selling price,
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  which is not uncommon, and essentially the financing and
• 5:54
  the money and time that I put into building the spec home
• 5:57
  started to drag down my construction business.
• 6:00
  They were separate businesses at the time, which is another thing
• 6:02
  you need to look into your building spec homes is should
• 6:06
  you have multiple companies? Should you set up a company
• 6:09
  specifically for certain investments or certain homes or
• 6:12
  have a holding company? You want to be talking to an
• 6:15
  accountant experience, you know, advisor in that regard as far as
• 6:18
  structuring, but realize that the money and time that you're
• 6:22
  putting into building the homes will affect your other business
• 6:26
  practices. And possibly if you have like,
• 6:28
  you know, custom home build clients or things like that,
• 6:31
  that one can affect the other and to watch out to it.
• 6:35
  Also, if you have too much debt and you're overextended and
• 6:39
  things don't go as planned, then you have to have some sort of
• 6:43
  contingency to float the carrying costs or cost of of
• 6:49
  keeping the house on the market before it sells.
• 6:52
  I see this all the time with contractors who wait too long to
• 6:55
  put the host on the market. Talk to your realtor.
• 6:59
  But the sooner you can get the property listed even before you
• 7:01
  start building and you can show a speculative home or the the
• 7:06
  plans that you plan to build, but have the house on the market
• 7:09
  so you can get a buyer ideally before you complete the project.
• 7:13
  And don't wait too long until you know everything is perfect
• 7:17
  before listing it. Another common mistake is over
• 7:20
  building for the area. So you do not want to have the
• 7:23
  best house on the street because if every other house is kind of
• 7:28
  older or not as big as your house, it's going to be hard to
• 7:32
  sell that house on that street because people are looking at it
• 7:35
  and the price tag and there the houses around them just aren't
• 7:39
  going to facilitate that type of investment from them.
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  Whereas if this, if there's nothing but luxury homes on that
• 7:45
  street and yours is actually a little bit smaller, maybe a
• 7:49
  little bit cheaper because of that, it's more desirable
• 7:53
  because it's a great neighborhood for a lower price.
• 7:56
  So this is going to lead into my next point of like, what should
• 7:59
  you bill? And they, the $100 million
• 8:01
  contractor that I mentioned, they're not guessing what to
• 8:04
  build. They're very, very dialed into
• 8:07
  the market. They've been doing it for years.
• 8:09
  They know exactly what colours, what sizes, what neighborhoods,
• 8:12
  which developments to develop, what the lot sizes should be.
• 8:16
  You really need to do your homework here and you need to
• 8:20
  connect with and talk with a lot of professionals to create your
• 8:24
  team spec. Homemade building is very much a
• 8:28
  team dynamic to it, and you need really good people around you in
• 8:32
  order to be effective with this. So some of the people you're
• 8:36
  going to need on your team is multiple Realtors.
• 8:39
  We talked to many different Realtors.
• 8:41
  You you're going to have your top, you know, 1-2 that you
• 8:43
  maybe going to list the house with, but you should be talking
• 8:47
  to a number of different Realtors.
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  Know what average, you know, prices are for the size, what
• 8:52
  they suggest as far as again, like every, everything down to
• 8:56
  square footages, colours, styles, location, finishes,
• 9:02
  types of homes, all this stuff you should have a really good
• 9:05
  clear indication of like these are the ones that sell the
• 9:07
  quickest. This is what you should build
• 9:09
  for this area and verify that information with a number of
• 9:13
  different Realtors to get a full picture because you're investing
• 9:16
  a lot of time, energy and money. And if you can't sell it, when
• 9:19
  it comes time to hit the market, you can have all these carrying
• 9:23
  costs and you're probably going to have to lower your price
• 9:25
  potentially than what you want. If it doesn't sell or the
• 9:28
  markets take a dive, which is typical, it may be 8 months to a
• 9:32
  year before that property actually hits the market or is
• 9:36
  ready for market. And by that time things might
• 9:38
  have changed significantly. Other great resources go to all
• 9:42
  the other builders show homes in the area, so there's probably
• 9:45
  new developments around your city.
• 9:47
  Go check out the other show homes and get some ideas.
• 9:51
  Talk with a few interior designers.
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  Ask them what you know. Have they built spec homes?
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  What seems to sell the quickest? What do you need to do and
• 10:00
  realize that this is very much an investment.
• 10:04
  So you need it to look like $1,000,000, but obviously cost
• 10:07
  you much less. So you definitely, you need to
• 10:10
  be thinking like economy as far as what kind of, you know,
• 10:14
  materials and certain fixtures that you're putting into it.
• 10:18
  But you need it to be at a high enough quality that someone's
• 10:21
  not going to walk into it and look around and, and you know,
• 10:24
  it feel cheap. So you need to find that that
• 10:26
  medium of like what level of finishes can I put in here
• 10:30
  that's going to make it look really good.
• 10:31
  It's going to be high enough quality, but I'm happy to put,
• 10:34
  you know, my brand and my name behind it.
• 10:36
  But it's not so fancy that it's got out of control.
• 10:40
  I had a friend who their first back home, they, they did that,
• 10:43
  they built the nicest house on the street.
• 10:46
  It was big. They went to, you know, a little
• 10:49
  bit overboard with some of their finishes, their tallow work and
• 10:52
  all these things. It was a beautiful home, but
• 10:54
  it's not on the market for a long time.
• 10:56
  And they ended up having to lower their selling price, kind
• 11:00
  of ratcheting down over a number of months and ended up not
• 11:03
  making any money. I believe they may have even
• 11:05
  lost some to know the exact numbers.
• 11:07
  But I know that they didn't turn a profit on that property
• 11:11
  because they had over over speculated overbuilt for that
• 11:15
  area. Whereas if they would have built
• 11:17
  a more modest home would have cost them probably a lot less
• 11:20
  and it would have sold a lot quicker.
• 11:22
  So now that you've got the knowledge and understanding of
• 11:25
  how to move into spec building, you're going to want to check
• 11:27
  out this next video on how to schedule projects and keep
• 11:30
  projects on schedule. Because time is money,
• 11:33
  especially in the spec building world.
• 11:35
  Every month that you can save in the production as well as the
• 11:38
  selling of the schedule of your house is going to save you a lot
• 11:42
  of money and make it much more profitable and lucrative to
• 11:46
  build your spec.