Years back, when land was a lot more plentiful in my area, I represented a few mid-sized builders and a couple of smaller ones. One of the mid builders scoffed at the mention of another one of my clients, saying he “foolishly built on ‘spec’; something I would never do. The shovel doesn’t go near the dirt until I have 10% in the bank.”
“Spec” (for speculation) builders do much of the work before a buyer makes a bid. Most allow buyers to customize a house if the accepted offer comes early enough in the process.
My mid-sized scoffer (who is sadly deceased, I’ve heard) ended up with a few houses in which the buyers defaulted for reasons I cannot clearly recall (I know there was definitely a divorce and there might have been a transfer). As he had a private investor behind him financing the construction to the tune of about $150,000-$200,000 in land, labor, and materials (excluding the options the buyers paid for directly) on each of the houses, and kept an average of $40,000 downpayment from each defaulting buyer, Mr. Scoffer became a spec builder, with fully finished houses customized to someone else’s taste.
Times were booming then, so the houses didn’t last long enough for my builder client to need cardiac attention or be forced to do business with money lenders with crooked noses. But I thought of him this morning as I realized how many builders across the country are in the same position as Mr. Scoffer, with homes either originally built for spec and/or those whose buyers defaulted due to circumstances or lack of financing. These builders are in the same shape as unsuccessful home sellers in terms of carrying a home they wish to leave behind, only multiply the builders’ numbers by hundreds of homes in some cases, with financing arrangements that were structured to be paid back in a few months rather than over 30 years. The costs are astronomical to the builders and the impact on communities will be quite dramatic.
Carrying costs to a highly leveraged builder may well put the company out of business, and if the backers were accountants and doctors, like the Scoffer Construction Company’s, they need to step in and take over maintenance, insurance, taxes, and marketing of the homes. Wanting to get some cash back and get out of the business of selling homes, they will probably agree to sell the remaining homes for a lot less than that paid by the neighbors who completed their transactions with the builder. If they find buyers who will still pay some premium for a new home while constrained by another’s choice of commodes, countertops, carpeting, and cabinets, what will happen in the community when appraisals fall and property tax bills are delivered to the builder’s original home buyers carrying a much higher assessed value than the spec homes?
Like almost any game that Joe West's umpiring crew is a part of, things are gonna get ugly.