Spec homes are very popular these days because it is so easy to “get in on the action” for reduced prices. But what exactly is a spec home? And why should someone even consider investing in them?
The simple definition of a spec house is of a house that is constructed on a specified and usually limited to price, with no open bidding on the contracts. So how is this different from a “reserve”? Well, a reserve is the actual, word-for-word amount that a buyer will pay for a house, without ever having the opportunity to inspect the property. In other words, a “reserve” is a true, binding contract that exists between the buyer and the seller – which is precisely why you should consult a licensed real estate agent when considering investing in a brand new home.
Now that we have established the difference between a reserve and a spec home, let’s discuss the similarities and differences between custom homes and spec homes. Like a reserve, a custom home is generally constructed by a particular architect, and its plans are exclusive. A reserve, by contrast, may incorporate a wide variety of designs and styles – but the architectural makeup of the structure is typically the same. The major difference between a reserve and a custom house is that the former cannot be altered in any way – such as changing the floor plan, installing exterior doors and windows, adding any additional appliances, etc… (although some reserves can be modified to incorporate changes – such as adding an extra bathroom – after the fact). The fact is that virtually all custom homes are custom homes – in the sense that the client has designed and created their home the way it is and will not be interested in making any changes to it.
So why would anyone want to invest in a reserve? While the majority of spec houses sold today are reserved homes, there are still those that are custom homes. Typically, custom homes involve some degree of customization – including additions, floor plans and additional appliances. For these reasons, builders who specialize in building custom-built houses are typically more attractive to buyers than builders who build ‘reserves’.
One major difference between buying a reserve and a flip is the amount of money that you have to invest. Reserves usually start at around $700K and go up from there. Flips, on the other hand, begin at around half that amount. Either way, reserve/flip investors have a much smaller investment to risk compared to those investing in houses for sale by the owner. Of course, there is also the possibility that you may not receive any return on your investment – which is part of the reason why flipping is so appealing to those who are looking for a quick return on their investment. Flipping, however, requires that you buy a house for a price significantly lower than what you paid for it, which can take anywhere from two to four years to recoup your investment.
Those who are planning on flipting will probably need to look into long-term rentals. This includes properties like vacation homes, townhomes and short-term rentals. These are all types of housing that are less expensive to maintain over time. If you plan on keeping your investment for the long haul, then it makes sense to purchase a townhome or a home that is designed as a short-term rental. While these are typically more costly to purchase, they are also a great opportunity to make a profit with your spec house investing.
It is also important to keep in mind that many real estate investors prefer to use the services of a property manager or agent when it comes to buying and selling new homes and properties. This is because some new home construction projects are not as stable as some other kinds of house constructions, and property management services can help investors find fix-and-flips that are available. Unfortunately, many people fall prey to the quick sale craze, which can be bad news for those wanting to flip their spec houses. However, if you are serious about flipping houses and ensuring that you receive a fair and reasonable price for them, then hiring a property manager or agent may be a good idea.
Finally, it is important to keep in mind that not all custom home builders will cater to the same market as, for example, architects, contractors or realtors. When buying a house, it is important to ensure that you are getting access to a builder who has the expertise and experience to construct houses that you can live in. Some builders will only work with established construction companies, meaning that they are unlikely to build houses for buyers who do not have a lot of money or resources. These types of builders are likely to focus their attention on middle-class families and individuals. For these families, hiring an architect or a contractor may be a better option than purchasing a custom house, especially if the builder does not have experience working with these types of customers.