Spec building -- market metrics?

Question

I am working on finding a site for my first spec build.  I'm looking in a few different neighborhoods, all next to each other and relatively similar.  These neighborhoods have seen a huge demand for new homes over the past few years.  They are all infill, city neighborhoods with great school systems.  A typical spec build consists of buying a older, smaller home and then replacing it with a larger, more expensive home.

New homes have been flying off the shelves the past couple of years and these older, "tear down" homes often have multiple offers on them the first day they hit MLS.

Lately, however, I've been noticing that the new homes are sitting on MLS longer and longer.  It used to be that they'd always sell within 30 days, sometimes 45, but now I see them routinely sitting on the market longer.  A friend and experienced spec builder brought a gorgeous new home to market in a great location and it's now been sitting on the market over 60 days.

I'm growing a bit concerned and wanted to reach out to the experienced spec builders to ask what other market metrics should I be looking at?  Building these homes has been a no-brainer over the past couple of years, but maybe that's changing?  I've spoken to a couple of builders and agents and they say it's just the summer season and that's what always happens.  Minneapolis is a buy in the spring and fall market according to them, because everyone is at cabins, traveling, etc during the summer months.  That's great, but I don't want to rely on anecdotal evidence.  I'd like to evaluate some hard data.

What market metrics do you typically monitor/evaluate to feel comfortable going forward with a spec build?

Thanks in advance,

Sean

Karen Margrave · Answer

Account Closed  If there's anything I can help you with, let me know. I will tell you, when we relocated to Orange County from far northern California where the market was completely different, we weren't as well versed on the market in southern California as we are now. Our first thoughts were that we would try out the area by starting with fix and flips, etc. We soon realized that the competition for that market was too hot, and properties were selling for higher than market value due to the exuberance of new investors.

Fortunately, a lot that had been given back to the bank came on the market in Lake Forest. We jumped on it. Our son designed a floor plan, and did some renderings. I had a sign made to put on the property, and put a flyer on Postlets. We received several calls. The very first couple we met with wanted to buy. We hadn't even closed on the land! Once we did close, we entered into the agreement for the purchase of the house, built it and sold it. We're now well on our way here in Orange County!

In your situation, you might be able to do something similar. Good luck. Let me know if there's anything I can help you with.

Karen Margrave · Answer

Account Closed That's a tough one. For us, we've always relied on our knowledge of local markets, and experience. For you, watching what is selling, (are prices appreciating or are others discounting their listings to sell?) How many homes are currently on the market in those neighborhoods that you're looking at? What is the median price of new homes selling? What is the local economy? What is the median income per household, etc.?

On homes that are selling, how do they compare to those that aren't? Sometimes it can be things you don't notice, like floor plans, small yards, etc., and have nothing to do with the market, but the property itself.

You can probably find a local real estate agent that would pull the information for you showing the demographics of the area, etc.

Remember, "spec" means speculation, and it is the highest risk building you can do. From what you have described, you have every reason for concern. Buyers usually buy to be moved in by the beginning of the school year, though some will move at other times of the year.

Another option would be to purchase the property, rent out the house, and begin marketing a new home to be built, etc., and maybe find a buyer upfront. That way you have someone paying rent while you are getting plans drawn and ready to build, etc.  I don't know what your experience is, whether you're a builder yourself, etc. so I'm not sure if that would work with your situation.

Good luck!

Chris Christianson · Answer

Account Closed

Good to hear you get it.  My last business was officed in the Grain Belt, 1910 warehouse which are artist studios purchased by Artspace from MCDA while I was there.

I too am not opposed to change and growth.  I live in Uptown, more specifically, LynLake.  Let's talk about growth.  I'm not opposed to growth and change but what they're doing right now in Linden Hills is really a travesty.  I have a hard time driving through that neighborhood anymore since it's becoming unrecognizable.  I don't feel the same way about uptown even though we've added somewhere north of 1000 apartments in the last couple years.  It's a bit more of an entertainment hub than residential neighborhood so it's more suitable for development of some degree.

Anyway, good luck with your project.  I'd like to see what you do when you get started.  I'm off to West St Paul to look at a nice 1911 fixer upper that's more my style.  Maybe do a little work on my 1892 rental while I'm there.

Chris Christianson · Answer

Hi Account Closed

In the words of Alice Cooper, "If I may put forward a slice of slice of personal philosophy..." The neighborhoods you're referring to are Linden Hills and Edina.  Here's how I see it.  Linden Hills at least is a popular neighborhood for a couple reasons.  One is because of the character of the homes in the neighborhood many of which were built around the turn of the century.  That would be the 20th century, and two, because of the character of the people these homes and neighborhoods attract.  As spec builders tear down these homes and replace them with suburban style boxes and McMansions, the architectural character of the neighborhood declines to that of a suburban subdivision.  This in turn, and in my personal opinion, diminishes the character of the homeowner it attracts.  There are some blocks in Linden Hills now that could just as well be in Woodbury therefore attracting the kinds of buyers that used to move to Woodbury.  The next step is to replace Coffee and Tea Ltd. with a Charbucks and toss the Linden Hills Coop out for a Wal-Mart superstore.

It's an age old problem in the cities.  Artists and creative folk move into a blighted area due to the low cost.  They fix things up and make them cool, then god forbid, trendy.  Once they become trendy then the less colorful or creative folk have to move in driving up prices and getting rid of all the things that once made the neighborhood cool in the first place.

I believe this is happening in Linden Hills.  The architectural character is well on it's way to the abyss of "Modern design" leaving those that built this community looking for greener pastures.  What's behind will be a shell of what once was and the feeding frenzy will end.

Doug Sheridan · Answer

Hi Account Closed is a dominant infill builder in the Portland market and he has shared his entire strategy through his free "Real Dealz podcast" series.

Good Luck!

Account Closed · Answer

@Chris Christianson by the way, this was somewhat of an old thread.  I ended up not moving forward with the project.

Account Closed · Answer

@Chris Christianson thank you for the comment!  And to be honest with you, I agree.

When I first moved to Minneapolis, I spent two years working at a nonprofit housing developer, Artspace Projects, who's mission is to preserve affordable housing for artists.  You are 100% correct about the "SoHo" effect -- the hipsters and artists make it cool, then everyone else moves in and drives up the prices and the hipsters and artists are forced to move out.  I enjoyed the work, my only beef was that I didn't enjoy providing for my family on a nonprofit salary.

And yes, I was talking about Linden Hills.  What inspired me was my experience with Artspace, combined with my love of the neighborhood.  I realized that many of these old houses were going to be torn down.  Some, honestly, I believe need to be, others can be renovated and others are just fine.  My house for example is still a small bungalow, but my family is growing and we are bursting at the seams.  I realized most people who are tearing down the homes don't care, they are in it for the profit.  But I do care and decided if these homes are going to be torn down and replaced, better I do it and make the homes fit in well with the neighborhood versus just letting other builders without a vested interest do the deals.  Can I save the neighborhood?  No.  But I can do a little bit to help.

That said, I am also a proponent of change and growth and understand how things evolve.

Account Closed · Answer

@Karen Margrave thank you for the comments.

This would be my first spec home, but I've been in the industry for 10 years.  I've worked primarily in multifamily and spent 6 years doing development in Silicon Valley and the past 4 have been working on acquiring large multifamily for private investor in Minneapolis.   I have my real estate license and have bought and sold a few homes as well.

I understand my experience doesn't necessarily prepare or qualify me for spec building so I've partnered up with an experienced spec builder who is going to work with me on my first handful of deals in exchange for me teaching him what I know about multifamily and helping him acquire bigger properties.

I actually live in the neighborhood I'm primarily looking to build in and have personally toured well over 100 homes in the past few years.  I have a decent sense of the market, but really appreciate your ideas on what to look for.  I've kind of been going by "gut feel", but as the market appears to be slowing it's obvious I need to review more data.

I will more closely examine all the items you mentioned.  Again, I sincerely appreciate you taking the time to answer my question.

Spec building -- market metrics?

Most Popular Reply