Spec Homes: a few questions

olivesmomOctober 2, 2012

We were planning on buying some property and having a custom home build in the not too distant futures. However, after doing some research it appears that we will not be able to obtain a construction loan any time soon.

I was pretty crushed until I came across a listing that I believe is commonly referred to as a spec home. The listing description states:

"Custom Home builder to build this wonderful floor plan or have the flexibility to design the home of your dreams. Rambler on acreage with a view of the mountain. Chance to build the home of your dreams with room to roam. Finishes include engineered hardwood flooring, slab granite. This builder believes quality is the only way!"

Is this a spec home? If so, we only need to obtain a traditional mtg loan, not a construction loan, correct? We could even use an FHA loan (within the limits), right?

Any downside to this sort of arrangement? We would want the builder to use our floor plan of course and I'm quite particular about most of the finishes and materials. Any advice? Thanks!

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virgilcarter

A "spec" house is a house built by someone who is "speculating" that someone will want to buy the house.

There are all types of spec builders--from highly experienced, ethical and reputable to chain-saw carpenters and their brother-in-laws who are working on the spec house part-time and have a firewood business on the side. Live bait shops are also a possibility!

Due diligence and buyer beware are the watch words for unknown spec builders!

The first step I'd take is to verify that I qualify for financing and how much (amount and rate).

Second step would be to check the builder's past work and references.

Third step would be to verify that the spec builder will customize the house plan and materials to fit your preferences.

Fourth step is to verify that the contract cost (plus 10% minimum contingency fund) is less than the mortgage you qualify for. Good luck!

    Bookmark   October 2, 2012 at 4:18PM
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mydreamhome

Everything VirgilCarter stated above. It's possible that the builder would carry the construction loan for you, so that would definitely be something to check into. The cost to build will be higher though than if you carried the construction loan as the builder will want to recoup the interest at the very least (but usually more). You will still need to put 10-20% down (could be higher or lower) and have preapproval for the mortgage loan from the bank. But again, definitely do your due diligence in checking the builder out and have an attorney review the contracts (you may want to post them here too for feedback) before signing anything.

Hope this helps!

    Bookmark   October 2, 2012 at 6:36PM
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david_cary

Are you quite sure you can't get a construction loan? I found those pretty easy to get since they are short term and relatively high interest - 5% for 1 year is a huge profit for a bank. They don't face all the mortgage requirements for conversion to Fannie Mae.

That little paragraph description honestly sounds like a near criminal builder. Is he trying to sell a used car? Anyone can go around saying they are a "Custom home builder" and there is certainly no guarantee that custom means quality.

    Bookmark   October 3, 2012 at 5:11AM
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olivesmom

David-

I haven't exhausted all avenues for a construction loan yet, but with a foreclosure in our past it has been "no" so far.

I agree that the description doesn't inspire the most confidence, though I think that is more the fault of the listing agent and not the builder. I haven't seen his work in person, but he has many presale lots in the area. He is a board member on the county's MBA, not sure if that means anything. If we move forward with this I will definitely check out his work and company.

    Bookmark   October 3, 2012 at 11:16AM
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minneapolisite

My understanding is that, at this stage, it is just a builder-owned lot and they will build either their chosen floorplan OR one that you select/provide. It will be a "spec" home once the floorplan is set in stone (i.e. once the permitting is done, or once the foundation is poured).

    Bookmark   October 4, 2012 at 7:55PM
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njasmine1

I'm getting a spec home built in Louisiana and I can tell you if the builder is not willing to do a turn key project you will need a construction loan. Ever since the recession most builders have learn a valuable lesson not to build homes they can't sell.

    Bookmark   January 24, 2013 at 1:02PM
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renovator8

I don't know why a builder would finance a house on your lot unless he owns a bank.

    Bookmark   January 24, 2013 at 1:27PM
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renovator8

The term "spec house" appears to be used here in a contradictory manner.

For a spec house there is no potential owner or buyer involved unless one shows up before construction is complete and makes an offer and the builder is willing to accept it.

Everything would be owned by the builder/developer until a buyer bought the house.

The term "turnkey" has so many meanings I would advise not using it.

    Bookmark   January 24, 2013 at 6:21PM
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olivesmom

I'd like to point out that this is an older thread I posted back in October, just in case anyone was confused after reading my more recent post about possibly buying a sloped lot.

This "spec home" listing is still avialable, though I've since decided that I probably do not care for the lot it is on. We will be able to purchase a new home in 1.5 years (FHA mortgage anyway). I suppose we might revisit all of this then, unless we end up buying a lot (as in paying cash for the sloped lot previously mentioned) in the meantime.

This post was edited by olivesmom on Thu, Jan 24, 13 at 19:35

    Bookmark   January 24, 2013 at 7:30PM
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shiltsy

Our first home was a spec home built to our specifications by a custom home builder. It was a wonderful high quality home, and although we have upgraded in size/price in many ways our newer homes have been lower quality.

Do your due diligence on the builder and don't let the lack of a construction loan process scare you off.

    Bookmark   January 25, 2013 at 6:59PM
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renovator8

If the house was built to your design and/or specifications it was not a "spec house". "Spec" is short for "Speculation" which means the intention of the builder is to design and build the house and then sell it. The usual connotation of this term is that the developer/builder has tried to build the house as cheaply as possible in order to lower the carrying cost and maximize the profit. To say a house was built "on spec" is to suggest it is lacking in quality.

Because this term keeps being misused on the forum I have provided a link below to an online dictionary definition.

Here is a link that might be useful: Definition of spec house

    Bookmark   January 25, 2013 at 7:58PM
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olivesmom

Renovator: so what would you call a house that a builder is constructing on a lot, allowing your choice of house plan or finishes? Not in a subdivision, just a lone house on a single lot? The term "spec house" wouldn't apply? Just curious.

    Bookmark   January 26, 2013 at 12:44AM
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Komeht

There are semi-custom spec homes. I bought one. Basically it was builder owned and we purchased after framing but before drywall. All finish out were custom selected. Otherwise we could make basic changes (e.g. Remove a non structural wall).

But 100% of the finish was our selections (flooring, cabinetry, hardware, tile, fixtures, faucets, color, doors, etc.). The only thing we didn't select we're toilets and appliances and that's because we were happy with builder selection.

    Bookmark   January 26, 2013 at 3:29AM
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renovator8

If a builder offers to build a home for you from a standard plan with modifications on his lot, he would be is a design-build developer offering a "turn-key" home.
A project might start as a spec home and change if a buyer was found before the project was substantially complete.

The term "semi-custom spec home" is an oxymoron.

    Bookmark   January 26, 2013 at 6:44AM
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Komeht

Builder building spec home, starts construction.
Buyer wants spec home with certain specifications.

Builder agrees...it's a spec home, that gets a semi-custom finish.

Whatever you want to call it, that's what it is.

    Bookmark   January 26, 2013 at 10:23PM
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renovator8

Call it whatever you want but to call it a spec home would be misleading. My comments are for those who want to avoid confusing and contradictory statements.

    Bookmark   January 27, 2013 at 7:38AM
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