Spec Homes: Is Building A Spec House A Good Investment?

Key Takeaways


If you’re in the market to buy a home, you may be having a hard time finding available listings. That’s because there’s a housing supply shortage all over the U.S., and it’s getting worse. According to Freddie Mac, this “severe” deficit increased from 2.5 to 3.8 million units within the last three years. Affordable, entry-level homes are especially hard to find. If your local market is performing well, building a new house might seem like a great solution to this problem. However, not all of us have the time nor the resources to build a custom home from the ground up. This is where building spec homes presents itself as a great alternative. Keep reading to find out if building a spec house is the solution you were looking for.

What Is A Spec Home?

A spec home is a type of brand new, move-in ready home. Typically, new homes are custom-built using the buyer’s tastes and preferences. In contrast, spec homes are built without any input from buyers. They feature options that were hand-selected by the builder and are sold to buyers as-is.


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Building spec homes

Benefits Of Building Spec Homes

You may be wondering why a homebuyer would opt for a spec home when they could build a custom home of their own. These decisions come with tradeoffs, and there are plenty when it comes to spec homes.

Here are several reasons why a homebuyer might choose a spec home over other options:

  • Affordability: The main reason for which buyers choose spec homes is affordability. Although spec homes have gotten a bad reputation for being cheaply built, homebuilders claim that affordable pricing comes from design efficiencies. Buyers should choose builders who carefully develop blueprints that will turn into high-quality, reliable homes.

  • Save Time: Custom homes take seven to eight months to build, which is a long wait. Spec homes are ready-built, so you’ll be able to move in just weeks after completing your walk-through and purchase.

  • Predictable Costs: Fixer-upper and new construction projects are often associated with unpredictable costs. Hidden issues, project delays, and materials issues can all drive up the price of building your home. Spec homes are move-in ready, meaning that you don’t have to worry about any surprises that can cost you.

  • Custom Designs: Although a spec home isn’t customized by the buyer, they still feature custom designs. The builder hand-picks various features and designs, making them more unique than “cookie cutter” homes.

  • Less Competition: Homebuyers who can’t afford to build a custom home tend to choose between fixer-upper homes and spec homes. Reality television shows have made fixer-uppers for buyers and investors alike, making the competition fierce. Homebuyers can simply remove themselves from this buying frenzy by going with a spec home.

Drawbacks Of Building A Spec House

Spec homes offer many benefits, but there are some drawbacks on the opposite side of the coin. Here are some potential downsides to consider before committing to a spec home:

  • No control: Lack of control is the biggest downside of buying a spec home. The builder hand-picks the style and features of the home, so it may not be the best fit if you prefer a lot of customizations. On the other hand, this can be an advantage if you’re not picky because it saves you from conducting your own planning, research, and decision-making. Also keep in mind that you don’t get to choose a lot or location within a community, and you typically cannot make structural changes to a spec house.

  • Reputation: Spec homes have an unfair reputation for being cheaply made. In reality, homebuilders can provide affordable homes by scaling design-efficient blueprints and sourcing materials and appliances at a favorable rate. Yes, of course, some builders might cut corners. You should always shop between different options and choose a builder that you trust.

  • Timeline: Spec houses are moved off the market quickly, which can be an advantage and a disadvantage. It’s advantageous because buyers can confirm their move-in date and lock in their interest rate quickly. Conversely, this quick turnaround time can work against buyers who need extra time to sell their current home.

Expert Tips For Building A Spec Home

So far, we’ve discussed the advantages and disadvantages associated with buying a spec home. For homebuyers, spec homes are typically complete and ready for move-in at the time of purchase.

Alternatively, you could choose to build and sell spec homes as an investment strategy. Here are three tips to consider should you choose to build a spec home for profit:

  • Set a realistic budget and timeline: It’s best to be realistic when setting up your initial budget and timeline. Although spec homes are generally built to sell quickly, don’t assume that your house will sell immediately. You may also end up paying more for the plot of land than you expected. Calculating your potential profit requires some guesswork, so it’s best to err on the conservative side.

  • Factor in your carrying costs: Don’t forget to include carrying costs when drafting up your budget. Carrying costs are the costs associated with owning and holding a property before you sell it. The longer it takes to sell a house, the higher your carrying costs will be. Taxes, insurance, and mortgage payments are all examples of carrying costs you’ll be obligated to pay during the time that it takes to build and sell your spec home. We recommend adding a buffer in your budget in case it takes longer to sell.

  • Execute your plans as soon as possible: New investors often make the mistake of waiting until they close on a piece of land before they begin planning their construction project. Instead, start planning projects in advance so that they can be put into motion right away. This includes interviewing and hiring contractors, finalizing blueprints and construction plans, and hiring your real estate agent. Carefully planning and executing these phases at each juncture of your project can help save you time and money.

Spec house

Is Buying A Spec Home A Good Investment?

Spec homes have gotten a negative connotation in the past, but unfairly so. There may have been cases in which builders cut corners to save on cost, but that could be the case with any type of construction. In reality, spec homes provide a great balance between quality and affordability.

Overall, buying a spec home can be a great investment. This is especially true during these times in which new, affordable, single-family homes are in a severe deficit. Here are the reasons why homebuyers and investors alike are building spec homes:

  1. Affordability

  2. Risk Reduction

  3. Immediate Availability

  4. Balanced Amenities

  5. See Before Buying

1. Affordability

There’s a severe shortage of single-family, entry-level homes in most U.S. markets, which means that new homes have to be built to meet demand. This is especially the case since the fix-and-flip market has gotten extremely competitive.

However, building a new home is expensive, and not every family can afford to do so. Buying a pre-built spec home is an affordable option that meets homebuyers halfway.

2. Risk Reduction

Buying a spec house can significantly reduce your risk. Reality television has glamorized the process of buying and renovating old homes, thus making fixer-uppers a popular option for homebuyers. They envision buying an affordable, older home and renovating it to meet their contemporary tastes.

However, what we see on T.V. doesn’t necessarily translate to reality. Inexperienced house flippers run the risk of hidden costs that take them by surprise. Damages and complications can drive up the cost of a renovation project, defeating the purpose of saving money.

By buying a spec home, you can have peace of mind knowing that you’re buying a problem-free, move-in-ready home at an affordable price.

3. Immediate Availability

With housing in such short supply, homes are selling and closing at warp speed. This means that sellers often have just a month or two to buy and move into a new home. When pressed for time, move-in-ready spec homes offer a great solution. Homebuyers can preview, purchase, and close on a spec home within a matter of weeks.

4. Balanced Amenities

Spec homes are built by experienced professionals. They tend to know what customers want and choose options based on popularity. Although you might not be able to customize your home fully, you’ll likely find a spec home that suits your preferences.

These experienced builders also have access to materials and appliances sold at wholesale prices and thus can forward these savings to buyers. Spec home buyers benefit from a cost-saving approach that balances amenity and quality without sacrificing the affordable price.

5. See Before Buying

Last but not least, spec homes are tangible. Prospective buyers can walk through and get the look, feel, and touch of the home before committing to it. If you’re not particularly picky, you’ll reap the benefits of moving into a newly constructed home without having to go through the stress of construction and making decisions around style, design, layout, and materials. All aspects of a spec home are hand-selected by professional, experienced builders.

What To Know Before Buying A Spec House

If you feel that buying a spec house is the right decision for you, you can start researching builders by looking up spec home listings. You can find these online or in local publications, such as your newspaper and real estate magazines. Through these listings, you can identify a few builders that are active in your area.

Next, spend time researching these builders by checking reviews, looking at their websites, and scrolling through their social media pages. Then, you’ll likely be able to narrow your list down to three to four builders that you like. Vet your preferred builders by conducting informational interviews, calling their references, and visiting some of their listings in person. That way, you can make sure that you like the look and feel of their properties in reality, not just from what you see online.

Builders will often recommend their preferred team of real estate professionals, but we strongly recommend working with your own real estate agent, mortgage lender, and property inspector. That way, you can feel sure that each professional is working to serve your unique interests and needs, not those of your builder. Make sure not to skip over the home inspection before buying your spec home, and read the fine print on your home warranty. Although your construction is new, you’ll want confirmation that everything is in working order and that you’re covered if anything goes awry.

Last but not least, don’t be afraid to negotiate with your builder. Spec home prices tend to be fixed, but that doesn’t mean they can’t accommodate you in the form of upgrades and modifications. This will help you get more value for your money without adversely affecting the value of your neighborhood.

Summary

The U.S. housing market is facing a severe shortage, and it’s only getting worse with time. Homebuyers are having a hard time finding entry-level single-family homes, and other options such as building custom homes and renovating fixer-uppers aren’t always feasible. Building spec homes provides a housing solution for those who seek a balance between quality, amenity, and affordability.


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