published about 9 hours ago
Buying real estate is risky. Building Real estate, on the other hand, can be even riskier, especially when you’re creating what you think is someone else’s idea of a dream home. This is exactly what spec house builders are doing.
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If you’ve never heard of a custom home, or are wondering how one compares to a model home or custom home, keep reading.
A special home is short for “speculative home.” In fact, they’re usually mansions or some other type of luxury property, so think great locations, mind-blowing amenities, and the ultimate in high-end features and finishes.
There are property developers with massive budgets who set out to build these stately homes with the hope of finding a buyer who can take it off their hands when it is finished. Sometimes the home is snapped up by an eager buyer before it’s even finished, and others sit expensive and empty waiting for an offer.
Spec housing is a risky business.
If you think that a large part of the risk for a special home falls on a builder, you are right. The process from land acquisition to project completion is about two years, says Manny Angelo Varas, an award-winning developer who is the founder and CEO of MV Group USAa full-service luxury construction company.
Add in rising interest rates (which affect buyer demand), material and labor costs, and shortages or delays in said materials and labor can all increase the risk for spec builders. Apart from all that, changing design trends can also reduce buyer demand.
Still, there is great reward to be had when that special home is sold; Varas says the typical return is about 30 percent for custom builders.
You can assume that wealthy buyers such as celebrities and titans of industry might love to add another spectacular home to their real estate portfolio. That may be true, but not all special housing finds a buyer. In fact, even experienced spec developers run into big problems. Notably, famed spec mansion developer Mohamed Hadid declared Chapter 11 on a $250 million mansion he built in Los Angeles. Not only is it the most expensive listing LA County has ever had, it’s also the largest. Right now, there’s a 77,000-square-foot mansion on a 37-acre lot — the largest residential area ever allowed in the county, reports The real deal.
It should be noted that the price of $250 million dollars is if you buy the house finished. But for $92 million – a relative steal! — you can take over the build at this point and customize it just the way you like it.
What is the difference between a custom home and a model home?
In areas of rapid housing development, it is not uncommon to see whole blocks of new housing popping up. These are not special housing; rather, they are model homes built with similar or even identical layouts and features that are likely to be a good fit for house hunters.
“When you think about a model home, you’re really looking at a community,” says Sarah Williams, founder of Societe Real Estate, a real estate brokerage based in New York. While model homes, like custom homes, are built in anticipation of buyers, the level of risk is lower.
“[The model home builder] does not take a greater risk; he just builds something and replicates something he knows already works,” explains Williams, noting that large developers may even have institutional backing, which helps mitigate some of the financial risk.
Note that the term “model home” can also refer to one of the built homes that is kept empty – or it can be staged – so that potential buyers can see in person what will eventually be built. That model home is used for touring purposes while the others are being built, and when the others are finished and sold, the original model home will likely be put on the market as well.
Is it a good idea to buy a special house?
It can be if you buy one from a reputable builder, says Williams, who also has experience selling custom homes in Florida. Here’s what she encourages her clients who are in the market to do when buying a special home:
Williams notes that not every spec developer is a career builder. There are some well-heeled individuals for whom property development is more of a passion project – which is why Williams says it’s very important to research property developers.
While the initial risk with a special home is assumed by the developer, the risk passes to the buyer, just as it does in all real estate transactions.
Varas says buyers should know that homebuilders may be trying to control costs by going all-in on visible features — such as high-end kitchen finishes and appliances — while cutting back on hidden features, such as HVAC systems and even cabinets.
“Look for the brand and efficiency of the home’s air conditioning or heating system and the voltage of lights and audio-visual equipment,” says Varas. “I always recommend that our clients have their AV supplier visit the site before they close so they can plan the necessary upgrades to the basic pre-wiring that many spec homes include.”
Specific housing vs. adapted housing
With all this discussion about how custom homes can be super expensive, it’s important to note that a custom home can be even more expensive. Varas says with a custom home, the buyer is on the hook for everything, from purchasing the lot itself to hiring the architect to covering all construction costs. However, many people find that the end result is worth it and they have actually built their dream home.
A special home, on the other hand, saves both time and money by knowing that someone else has taken on the burden of making all those decisions and paying the bill in the first place. Varas says that when a buyer buys a spec house that is still under construction, they are usually able to choose their custom features so that the home is eventually finished the way they prefer.
“Each buyer’s personal budget will determine the level and caliber of customization possible,” he explains. “Consulting with a professional designer is a smart investment for buyers to understand how realistic the look they envision is.”