One of the great things about custom building is working with OPM, other people’s money. Spec and production builders lie awake at night counting the dollars they have tied up in unsold stock and sweating every uptick in the prime rate. Meanwhile, custom builders may not be sleeping either, but at least they are free to worry about matters that are actually within their control. So why on earth would a custom builder voluntarily build on spec, especially in today’s uncertain market? The answer, it turns out, depends on who you ask. And, after talking with some spec-building custom builders, we must admit there is some sense in what they’re doing.
Lots of home builders got into the spec business by building and flipping their own residence, and George Lewton has never kicked the habit. “We’ve done it five times,” says the Albuquerque, N.M., custom builder. He’s started the process on several other houses, too, he says, “but they sold before we could move in.” The strategy limits his financial exposure by offering the fall-back position of simply staying in the house if the market weakens. He is never stuck with a house that he has to sell. “We’re still doing the thing of living in it for two of the last five years to beat the taxation,” Lewton adds. Combining exemptions for his wife and himself allows him to shelter up to $500,000 in profit on the sale of a house. “You can’t make $500,000 on a house anyhow,” he says, “but you can limit your liability by building it for yourself.”
Relocating every few years sounds like a hassle, but Lewton doesn’t seem to mind. And the next time he and his wife move, they won’t be going far. “I noticed when we put a sign out on our house, the guy next door had a sign out on his,” says Lewton, who bought the place and is currently remodeling it. He says that remodeling rather than building new offers an additional advantage. “The cost of a permit to build a new house is about $10,000, because of the impact fees, whereas the remodel is about $500.”
Potomac, Md., custom builders Emily and Andy Rosenthal started out in the business as small production builders. “In the old days we only did spec houses,” Rosenthal says, “when there was land available in the area.” That era ended around the year 2000, when national-scale builders began to compete for scarce buildable land, and the Rosenthals shifted their focus to remodeling and custom building. But the speculative impulse dies hard. “When we have a hole in our schedule or a piece of property presents itself,” Emily Rosenthal says, “we’ll do a spec.” The practice allows the company to even out its workload and cash flow and—in recent years—take advantage of rapidly appreciating property values. But the main draw for the Rosenthals seems to be personal satisfaction. “What we love about what we do is the things we learn and the ways we can be creative,” says Rosenthal. And every so often, they like to go through the process wearing the owner’s hat. Their latest spec effort is a 1920s-style infill house in Chevy Chase, Md., that sold for $2.7 million. “It’s perfect for the neighborhood,” Rosenthal says. And with no clients to shepherd through the selection process, “we had a really good time picking out all the new stuff. We just had a blast.” Of course, a little of this kind of fun goes a long way. “We joke that we do one every four or five years, whether we need to or not,” she says. “Andy doesn’t have the psyche for an unsold house. He’s very comfortable working with OPM.”
There is lots of OPM floating around Fairfield County, Conn., the epicenter of the hedge fund industry. “Every fantasy comes true in Greenwich,” jokes custom builder Dave Prutting, whose super-high-end business is booming in consequence. But Prutting has noted a gap in the local real estate market and believes he has just what it takes to fill it. “It’s a luxury in-town house with all the bells and whistles,” Prutting says. “It’s definitely leaping beyond what’s being offered here in New Canaan.”
