A builder recently asked for my thoughts on the right mix of specs and pre-sales. My first response, as those who work with me have come to expect, was that there was more than one question buried in that one. Before we could talk about the answer, we needed to pull the pieces apart \u2013 because it is hard to find the right answer when you are juggling multiple ideas at once. Once we work through the individual pieces, we can put it back together. In this case, that meant asking five questions before the original one could be addressed.<\/p>\n
This is the threshold question. There are times when your biggest concern is simply whether you can sell homes at all \u2013 can you move more than a certain number per month, regardless of price?<\/p>\n
In that environment, you\u2019re naturally more reluctant to start specs. At other times, as in the early pandemic, it was nearly unfathomable that you couldn\u2019t sell them. The harder question then became whether you could control costs and price them for a profit. In a hot market, you\u2019re more likely to wait until near completion, when costs are known and you\u2019ve captured as much market appreciation as possible \u2014 and in that situation, you could have spec\u2019d them up and likely captured option profits as well.<\/p>\n
Before answering the spec question, it is worth knowing what percentage of your projected profit comes from the base house, versus options, versus lot premiums. Builders sometimes discover their pro forma <\/em>results are more dependent on options than they assumed \u2013 and whether options account for a significant share of the return, that assumption deserves closer scrutiny.<\/p>\n Starting specs and selling later can limit option sales. If you\u2019re a California builder with a fixed product \u2013 set floor plans, fixed mix, fixed streetscape \u2013 you\u2019re not offering room options beyond minor changes (converting a loft to a bedroom, for instance), so your option revenue comes from finishes. In that case, you might start specs and push to sell before it\u2019s too late for buyers to make finish selections. But if you offer meaningful room options and derive significant profit from them, starting specs may cost you more than you realize.<\/p>\n You might feel cautious about specs because of concerns about market depth. If you\u2019re surrounded by other private builders with similar concerns, everyone limiting specs may be the right outcome for the market. But if you\u2019re competing with Lennar or D.R. Horton and they\u2019re pricing to move spec inventory, and your buyer profile isn\u2019t high-end enough to attract buyers who \u201cwant what they want,\u201d you may need to build specs simply to stay competitive.<\/p>\n If you tend to hold for margin, you probably shouldn\u2019t start many specs. If you\u2019re prepared to sell at whatever the market will bear and believe minimum velocity is essential, starting specs makes sense. This is less a financial question than a strategic one \u2013 it reflects the kind of builder you are and the business model you\u2019re running.<\/p>\n If you don\u2019t start specs, there are costs that don\u2019t appear directly on a pro forma<\/em>. Erratic starts are not the way to earn favorable subcontractor pricing or loyalty \u2013 subs price in uncertainty into their bids.<\/p>\n Internally, a prolonged stretch without starts weighs on employees. In a homebuilding operation, everyone knows that if you don\u2019t start them, you can\u2019t close them.<\/p>\n Once you\u2019ve worked through those five questions, the spec question largely answers itself \u2013 not because there is a universal right answer, but because the right answer for your company, in your market, at this moment, has come into focus. Market conditions, competitive dynamics, the balance between fear and greed, your product type, and your philosophy on price versus pace all shape what the correct call is. They just need to be examined one at a time.<\/p>\n Most decisions in homebuilding work this way. The instinct is to wrestle with the combined question until an answer emerges. A more reliable discipline is to recognize when a question contains other questions, separate them, and work through each one. The synthesis at the end is usually straightforward. It is the untangling that does the work.<\/p>\n That\u2019s not a hedge. It\u2019s the actual answer.<\/p>","protected":false},"excerpt":{"rendered":" A builder recently asked for my thoughts on the right mix of specs and pre-sales. My first response, as those who work with me have come to expect, was that there was more than one question buried in that one. Before we could talk about the answer, we needed to pull the pieces apart \u2013…<\/p>\n","protected":false},"author":0,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false},"categories":[1],"tags":[],"_links":{"self":[{"href":"https:\/\/mk.gen.tr\/en\/wp-json\/wp\/v2\/posts\/49110"}],"collection":[{"href":"https:\/\/mk.gen.tr\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mk.gen.tr\/en\/wp-json\/wp\/v2\/types\/post"}],"replies":[{"embeddable":true,"href":"https:\/\/mk.gen.tr\/en\/wp-json\/wp\/v2\/comments?post=49110"}],"version-history":[{"count":0,"href":"https:\/\/mk.gen.tr\/en\/wp-json\/wp\/v2\/posts\/49110\/revisions"}],"wp:attachment":[{"href":"https:\/\/mk.gen.tr\/en\/wp-json\/wp\/v2\/media?parent=49110"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mk.gen.tr\/en\/wp-json\/wp\/v2\/categories?post=49110"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mk.gen.tr\/en\/wp-json\/wp\/v2\/tags?post=49110"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}What is your competition doing \u2013 and who are they?<\/strong><\/h2>\n
What is your willingness to meet the market versus protect margin?<\/strong><\/h2>\n
What does a no-spec posture cost you beyond the obvious?<\/strong><\/h2>\n
Putting it back together<\/strong><\/h2>\n