Spec houses and their troubles

I recently received an inquiry from a client about a certain spec house (which I’ve written about before, to its agent’s fury, so I’ll leave the exact identification out this time). The builder has $3 million invested in the land, at least $3.5 million in construction costs and probably $4, and has priced it well above that total in order to recoup his expenses and nab a profit. It’s never going to happen.

At the top of the market, this place might have sold for $6.5 million, in my opinion. If I’m right, the builder was underwater before he even completed the project. But now it’s worth far less and there are nearby comps to prove that. Plus, I’ve shown my client some spec houses whose builders have given up the dream and are willing to walk away with millions of dollars in losses, just to be able to walk away (the curse of personal guarantees). How are you going to get a client back on the farm after he’s seen Paris? Even if it turns out that my client doesn’t want the spec houses he’s seen, he likes their price, and I doubt he’ll be willing to pay an extra $3-4 million for essentially the same house with a layout more to his liking. He’ll probably decide to wait the builder out, and I  wouldn’t blame him.

This is not a positive development for any spec builder without the resources to keep his unsold houses going for a couple more years.

4 Comments

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4 responses to “Spec houses and their troubles

  1. anonymous

    Didn’t a lot of these builders also pay nearly 100% more than today’s prices for land back in ’05 or so?

    Haven’t construction costs (both materials and labor) decreased some 20% post-Bubble?

    Builders seem to be fighting a Bubble basis cost in a deflationary, credit-constrained world

    And not sure one can safely assume all land and/or build qualities are equal, esp stuff from Bubble era when any crap would presumably sell for stupid prices and profits….lots of apples vs rotten oranges pricing comparisons

    • christopherfountain

      I agree with all your points, anonymous, especially the purchase of marginal lots. I suppose even houses on the worst of these lots will sell, eventually, but there’s the question of whether someone who buys a $2 million house wants to or can afford to pay the upkeep on a 10,000 sq. ft. house originally priced at $8.5 million? Maybe these things get torn down and someone starts again. I don’t know.

  2. Anonymous

    What is happening here ? WHY DID these builders put nice houses on lousey land or build a horror house on perfectly good land? What were they thinking that buyers are that stupid , for the numbers they were asking we should be getting a dream house . EVEN IN GREENWICH. Now they sit.

    • christopherfountain

      Anonymous, beats me – but the builders kept pushing the envelope on what was acceptable land and what was acceptable design until the market put a stop to it. Taste in land hasn’t changed, although for awhile I guess some buyers overlooked it if the house that sat on marginal land was big and shiny enough, but I do think that, at least for now, the 15,000 + sq. ft. house is a white elephant. If so, the big houses on lousy land are headed for oblivion. Good riddance.
      Which leaves us with the house on the North Street Merritt Parkway entrance, as well as a slew of others. Will they ever sell? I have no idea. They won’t sell before other houses on better land sell, but maybe then. Someone better have deep pockets.