Spec-ulation: what not to do in a downturn.(Case Study)

Scenario: Charlie C. builds six custom homes a year, priced from $600,000 to $1 million. He also builds two spec homes a year. While business is still good, Charlie has noticed a recent softening of demand. Buyers seem to be more price conscious, and there are fewer prospects knocking on his door. Since everyone knows that building spec homes is riskier than building custom homes, Charlie wonders if now might be a good time to stop building specs.

Solution: While building nothing but spec homes can be risky business, mixing spec homes with custom homes is actually a risk-reduction strategy. Spec homes provide several important advantages for custom builders. They tend to smooth the work flow and allow increased production efficiency. This spreads overhead over a greater number of houses thus reducing overhead per house. Since builders tend to build the same spec home over and over, there is less risk that there are unexpected costs buried in the plans.

Spec homes also serve as a marketing tool; they let prospective buyers see your work without having a model home. This generates additional custom work. In addition, spec homes appeal to a different type of buyer than custom homes. Spec people are unwilling to wait months while their custom home is built and want to avoid the time and hassle of making all the decisions and selections associated with building a home from scratch. For these buyers, buying a spec is also a risk-reduction strategy because the home is nearly complete when they buy it so they can easily visualize the final result. There is less risk that the completed home won't meet their expectations. And finally, there is a smaller ...