What is a Spec House in Real Estate?
BS
Last updated 03/20/2024 by
Bryce SandersSummary:
A spec home is a new home that was built as a speculative (that’s where the “spec” comes from) investment without having a buyer lined up. They are sometimes confused with custom homes, but unlike true custom homes, they don’t allow the buyer to choose the location, house design, or floor plan. However, the buyer does usually get to customize the home’s paint color, fixtures, and lighting. Spec homes have many advantages, like a move-in-ready status, but also some disadvantages, including a set layout and location.
Many people have their dream house in mind, and some even get the chance to build theirs. They hire an architect and are involved in every phase of the design. This new house is custom-built for them. However, this takes a lot of time and money.
If this isn’t what you want, a spec home may be more appealing. Spec houses are also constructed by custom home builders, who have already chosen the site, design, and floor plan of the house. They construct the house, often listing it through a real estate agent before completion, so the new buyer can customize the finishes before the house is completed. The result is a move-in ready home with some customizing options.
In this article, we talk in detail about the benefits of a spec home, the drawbacks to consider, and why this may be the perfect housing option for you.
Why is it called a “spec home”?
In simple terms, a “spec house” is a house that has been built as a speculative investment. Builders don’t construct spec homes to attract one specific buyer but rather attempt to attract a crowd of potential buyers who want a brand new home they can customize.
Put another way, let’s assume there are two types of houses: new and used. New houses aren’t built yet, and used houses are already constructed and occupied by the previous owner. Spec houses fit in the middle. The home was built, but no one has lived there yet. The home buyers will be the first owners and occupants.
What is the difference between a spec home and a model home?
Spec homes and model homes are similar. Both options are move-in-ready homes and both are built without a specific buyer in mind. However, there are a few key differences to keep in mind.
- Purpose. The purpose of model homes is to show prospective buyers the different floor plans available. If there are six different floor plans, the development likely has six model homes. Spec homes are built when a builder wants to take advantage of an up-and-coming neighborhood or nice piece of property. The goal here is to make a profit, not show layout options.
- Number of builds. Model homes tend to be built in batches in a new development to demonstrate different layout options and begin forming a development community. Spec homes are typically constructed one at a time depending on what builders can afford and what the current housing market looks like.
- Customization. The spec house might be almost completed, allowing the buyer to choose some finishes and fixtures. Since model homes function as show homes until they sell, the interior is completely finished.
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What is the logic behind spec homes?
Spec homes may sound like an odd construction process but there is a logic behind it. While custom houses are constructed around a buyer’s exact specifications, they can take months to build. And not all custom homes proceed without issue, as many buyers are left waiting for their dream homes due to unforeseen complications.
The trade-off? Play to the housing market and build a semi-custom home with a popular architectural style. The builder constructs the spec home assuming it will sell easily at a great price because of the home’s location. Even though the floor plan is done, the interior design is left to the buyer, who also gets a move-in ready home without the long wait of a custom build.
What’s the difference between spec homes and semi-custom homes?
Though “semi-custom” brings spec houses to mind, these are not the same type of housing. Many quality home builders speak about their portfolio of semi-custom houses which can be a great option. However, this is not a spec house.
A semi-custom home is a pre-planned house that potential buyers can customize to some extent. This customization, however, is limited to the floor material, wall color, and fixtures. The home’s layout, including room size and even ceiling height, does not change.
Another major difference is construction. A spec home is mostly built with a close move-in date, whereas a semi-custom home has yet to be built.
What does a spec house cost?
New homes can be pricey due to the level of customization. The home buyer usually pays on a square footage basis and remains involved in the entire construction process, including laying out the floor plan and choosing appliances and paint colors. Building your dream home isn’t cheap.
However, spec homes remove most of these steps. While the interior design can be customized, the construction is already done. This allows spec homes to sell for less than true custom-built homes.
How is the price of a spec home determined?
More factors determine the price of a spec home than you might think. The pricing starts with the basic factors, like the cost of the land and the construction of the house. Even though the exterior isn’t completely custom, you still might be getting a one-of-a-kind home, which could affect the price as well.
As with any home, the cost of labor and materials are not the only factors that determines cost. The location, demand for housing, availability of homes, and selling price of comparable properties all play a role in determining the price of a spec home.
What are the building costs of a spec home?
Most builders know to consider the land, construction crews, and building materials when building a new home. But there’s a cost that many don’t consider.
This is the cost of financing the project until you can sell the house. This involves permit fees, property taxes, and insurance. You’ll also need a construction loan from the bank to get started. Not only can these interest rates be high, but the cost of fees and property management can quickly add up.
Are prices on spec houses negotiable?
Technically, you can negotiate spec house prices, but a lot depends on demand. If your real estate agent says there are 35 viewings scheduled for the house and two offers have been submitted, negotiating on price goes out the window.
However, you might have a better chance of negotiating the price if you’re buying in a slow market or during a time of the year when fewer buyers are looking for a home, such as winter. After all, spec homes are built for speculation, and a custom builder wants a quick sale for several reasons. In general, though, don’t expect to get a spectacular discount unless the builder is overextended and needs cash quickly or the real estate market is in a slump and nothing is moving.
Why are spec homes cheaper?
Spec homes are cheaper than custom-built homes because the builder has chosen the land and layout. The builder wants to sell the house, recoup their investment, and repeat the process quickly. To do this, they need to price the spec home competitively.
Do spec homes come with appliances?
Most spec homes come with appliances, the prices of which are included in the price, though they may not be installed yet. As the buyer, you may have the opportunity to upgrade the appliances before you close. Be sure to ask the builder about appliances before making an offer on a spec house.
How to finance a spec home
Like most homes, you’ll need financial backing to purchase a spec house. It’s also best to approach the builder with a preapproval letter to show you have the ability to purchase the house, especially if the home has gotten multiple viewings or offers.
You can start your search with a look at some personalized reviews of mortgage lenders.
What are the pros and cons of spec homes?
While spec homes offer a lot of benefits, it’s important to consider the downsides as well before purchasing one.
Should I buy a spec home or a custom home?
It all depends on your budget and what is important to you. Let’s break it down by housing option. In this example, we’ll say you have four choices and are happy with the location of each property:
- A custom house,
- A semi-custom house,
- A spec house, or
- An existing house a current owner is selling.
If you are prepared to wait, buying a new build makes sense. However, if you want to move in quickly, a spec home or existing house makes sense. If having a degree of customization vs. remodeling an existing house, your decision-making should lean towards the spec home.
| Existing house | Spec house | Semi-custom house | Custom house | |
|---|---|---|---|---|
| Move-in ready | ✓ | ✓ | ||
| Custom fixtures | ✓ | ✓ | ✓ | |
| New build | ✓ | ✓ | ✓ | |
| Wait for build | ✓ | ✓ | ||
| Layout options | ✓ | ✓ | ||
| Custom layout | ✓ |
Why not buy an existing home?
Though existing properties are often cheaper, purchasing a new home comes with several advantages. When you buy an older property, you get the house as well as the upkeep issues. With a new home, everything is new, from the HVAC system to the appliances to the carpeting. You shouldn’t have repair issues in the near future.
In addition to fewer repair concerns, new homes are often built next to other new homes. These homes are often in a similar price range, which helps establish the price and resale value of your home. When you buy an existing home, you’re likely buying in an area where the age and condition of homes vary.
What should I consider before investing in a spec house?
Spec homes are a unique form of housing that requires a lot of planning for everyone involved. Before building or buying a spec house, consider the following.
Builders
The home builder arguably has the most difficult position in spec housing. Without a buyer in place, no one is responsible for footing the bill but you. You need to acquire the land, get the building permits, hire an architect to design the house, get it built, and pay all the carrying costs until the house is sold. That can be expensive.
You may be financing the construction through a bank, but you’re likely using a construction loan. This loan charges a higher rate of interest than conventional mortgage loans. Let’s not forget that this is on top of paying for home insurance and property taxes in addition to working with real estate agents so they’ll show the house.
Buyers
While buyers have an easier job, there are still several factors to consider. The first is customization. While spec homes can offer some customizable options, the majority of the home is already decided. This may work for some people who don’t mind a predetermined layout but be sure it’s what you want.
The second is cost. A spec home likely won’t be as expensive as a custom or semi-custom home, and if you plan accordingly you could find that builders will readily negotiate prices. However, the quality build and customizable features mean you’ll drop a pretty penny on a spec home.
BS
Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor” is available on Amazon. Bryce spent twenty years with a major financial services firm as a successful financial advisor. He has been published in 40+ metro market editions of American City Business Journals, Accountingweb, NAIFA’s Advisor Today, The Register, LifeHealthPro, Round the Table, the Financial Times site Financial Advisor IQ and Horsesmouth.com.
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