Failed Anatomy of a Spec Home Deal (HA 1640)
Failed Anatomy of a Spec Home Deal (HA 1640)
Transcript:
Steven Butala:
Steve and Jill here.
Jill DeWit:
Hello.
Steven Butala:
Welcome to the Land Academy Show, entertaining real estate investment talk. I guess this is the house academy show. I’m Steven Jack Butala.
Jill DeWit:
And I’m Jill DeWit, broadcasting from the valley of the sun.
Steven Butala:
Today Jill and I talk about the failed anatomy of a spec home deal.
Jill DeWit:
So this is interesting, because now where we are with housing, right? People are talking about housing shortages. People are talking about getting things rezoned, so you could have more homes, like LA county, have more homes on a lot to make it for, so there’s more places where people to live, right, and affordable. And it’s interesting. And there’s a lot of building going on. Not just renovating now since COVID and people are home, but a lot of people are moving and choosing to buy land. Yay! Happy for us. And put houses on there. And it’s just mind boggling to me, some of these, I think very risky decisions that they’re making. Especially, it’s one thing to buy your own piece of dirt and hire your own architect. And it’s your own money. You’re not going to sell it. You’re buying it to build for you and you’re going to move in. That makes sense to me.
Steven Butala:
Jill’s emotional about this topic. Let’s take a question first. And then we’ll get into the show.
Jill DeWit:
Save it. [crosstalk 00:01:25]
Steven Butala:
Let’s take it. Question posted by, members on LandInvestors.com. Online community is free, and don’t forget to subscribe on the Land Academy YouTube channel and comment on the shows you like.
Jill DeWit:
Host wrote, how would you price a mailer if the sold comps are 50% low than the for sale comps? So, sold is $40,000, for sale right now is $80,000. And each data set consists of approximately 200 comps. Well, first of all, I’d be high fiving myself because this is going up. It’s becoming more expensive area. Is there more to it or is at the end?
Steven Butala:
That’s it?
Jill DeWit:
Okay, got it. So, what do you want to say?
Steven Butala:
There is brilliance and simplicity. And this is an absolute brilliant question from somebody in Discord that I have never heard of. I think they’re new, and they’re clearly smart. What they’re saying is, I pull the data set and what we teach is you got to look at everything that’s for sale, you got to look at thing that’s sold, and this person’s saying, there’s 50% variance in this stuff. All the sold comps say they’re 40,000. All for sales comps say they’re 80,000. One of the moderators came in Kevin and said, first thing I check for is an error in data. Meaning, you might be the error Host, but I don’t think that. It’s what Jill said. Jill’s initial thought was, hey, the market’s going up so fast.
Jill DeWit:
It could be.
Steven Butala:
So that’s one… No matter what, we can all agree this is a data exception. This is not usually what happens. So it fascinates me innately. Data exceptions fascinate me, not the normal stuff. We all know the normal stuff. So, maybe it’s a hotness, market hotness thing like Joe says. Maybe it’s a data exception like Kevin, our moderator says. Or maybe, you just do what I say all the time and follow the program. You take the $40,000, you take the $80,000, you average them out. That’s 60,000, and you offer 10 or 20% of 60, 10% of 60,000 is six. So if you offer between six and $12,000 and you’re right or wrong, at between 40 and $80,000 on the sale side, you win
Jill DeWit:
That’s easy. I would make sure too, that they sold $40,000 comps, one thing I forgot to add. I go in and toggle and back and forth and play with the… When was that? Because if all your sold comps and it’s going back to the beginning of time, that’s not good. But it’s the last 12 months, now I’m feeling good. And everything for sale, because it really could be going up. Some areas it is this nuts.
Steven Butala:
So what we’re doing is deconstructing this problem, this data problem. And we’re providing reasons and solutions and doing some smart stuff. We’re inherently not even knowing it. In front of a camera, deconstructing this problem. And by doing so, we are inherently reducing our risk. Which leads me right into this show topic. We don’t want risk. Every time a dollar comes out of your pocket, there’s risk associated with that. Some of it’s, I’ve lost the dollar entirely forever, like when you buy something at a convenience store. All the way to, I know with extreme amount of confidence that I’m going to get $2 back when I spend this dollar. Which is what we do for a living, when we buy and sell land. Spec houses? I don’t think so.
Jill DeWit:
Let’s go to the show.
Steven Butala:
I was.
Jill DeWit:
Okay, good.
Steven Butala:
Today’s topic, the failed anatomy of a spec home deal. This is the meat of the show. Let me define spec him real quick. Cause I know you want us to talk and then you should jump in for sure. Spec is short for speculation. The nature of the word speculation is, let’s see what happens.
Jill DeWit:
That’s like end of show. Who does that? [crosstalk 00:05:19] Let’s spend 8 million and let’s just roll those dice and see how that goes, okay.
Steven Butala:
So, I don’t speculate at anything.
Jill DeWit:
No.
Steven Butala:
Let me define how houses and real estate gets developed. And I’m not talking about a company like Toll Brothers or Shea Homes that goes in and buys 2000 acres of agricultural land on the fringe of a major metropolitan area. Subdivides it, goes through entitlement process, puts all the infrastructure in and goes vertical on thousands and thousands of homes with office buildings of teams of marketing people. That’s not a speculation. They know exactly what’s going to happen. They spent millions of dollars on a feasibility study and they have all the capital to do it.
Steven Butala:
They’re not speculating on anything. Within a great degree of certainty they know what’s going to happen and they know how much they should sell the houses for and how much they’re going to, what they’re going to yield. They better because they have a hundred thousand shareholders behind them wondering with, how they’re spending their money. So there’s a great system of checks and balances there. And I’m not talking about renovating a house like on HGTV. I’m talking about buying a piece of land, and building a house on it. But, and when you’re done with it, it’s for sale.
Jill DeWit:
Without, and you don’t know who the buyer is yet. So that’s your definition, of spec homes. Okay. Well then, okay. You just cover the Toll Brothers thing. Then there’s the other version of it, which is the one offs and the custom builders. This is a part I’m just scratching my head, going-
Steven Butala:
Me too.
Jill DeWit:
… How do they justify this? And here’s why. I’m getting drinking coffee this morning. And I’m kind of just looking online. We get in the car, we drive around and I’m watching this one go up. And I’m just thinking to myself, what huevos these, that’s not the right word.
Steven Butala:
No, that’s the right word.
Jill DeWit:
That’s the right word? Okay. To take on this risk. Let me tell you the numbers I’m talking about. This particular site that we know of, they spent between one and two million. That’s like 1.5 for the dirt. And when I say dirt, I mean dirt. It wasn’t a tear down. There was nothing there.
Steven Butala:
It’s never been developed.
Jill DeWit:
The beginning of time. They have had to bring in everything including, and it’s not level. We all talk about the grading and everything, they are jack, they are drilling and bringing in excavators. And, the rocks, it’s not gravel. The rocks… We thought they were going to have to blow up some stuff. I’ve yet to see blowing up anything. But they’re sure digging and drilling and cutting into the side of a mountain almost to make this happen. Again, this is a spec home. This is not someone who bought the dirt and they love it, and they’re going to live there and they’re building their dream home. These guys are, think are trying to build somebody’s dream home. And I’m just like, I just, I don’t know how they do it. So, they’re going to spend, they’re going to probably be in probably two million before they start building.
Steven Butala:
That’s a good number.
Jill DeWit:
So, now, and, the architect and the plants and the materials. And of course, when you’re spending two million dollars just to make it ready and to get the dirt, boy you better believe it better be good, what you’re putting on there. So maybe they put another half million to a million into the construction.
Steven Butala:
Well, it’s a 7,000 square foot house at, let’s say $300 a foot now.
Jill DeWit:
Right.
Steven Butala:
So that’s $2 million. 2.1, 2.3 for soft and hard costs.
Jill DeWit:
You know what’s so amazing to me too? I just like, no one’s writing checks for this. I’m sure of it.
Steven Butala:
Yeah. It’s a bank.
Jill DeWit:
So, yeah. So they did all this and they convinced people to loan in the money. I’m pretty. I think I’m a good salesperson. Whoever did talk people into that one, they’re a fantastic sales person. I’m like, that’d be hard to really sell that, and say, this is what’s going to happen. This is what we’re going to do. And we’re going to sell it for six, or more. So, I think if you could… They start to pre-sell these things. If you haven’t noticed, some areas of the country when they do these custom spec homes, they’ll start to post them for sale, not even being done and only having plans done. I’ve seen with cabins, haven’t you seen that too? Plans with dreamy cabins and they’re selling you the property and the plans.
Steven Butala:
That’s not a spec. And, I’m not saying anything negative here. That’s not a spec deal. What it is is they own the land. They have a-
Jill DeWit:
And they show it’s possible.
Steven Butala:
They have a pre-approved, that nobody broke ground on anything. They have a pre-approved structure by the municipality and it’s all ready to go. All they need is for you to buy it, as the end user. [crosstalk 00:10:07]
Jill DeWit:
That makes more sense to me.
Steven Butala:
That makes complete sense to me.
Jill DeWit:
Right. But this one, they’re going for it. So I guess my whole point is, I just want to talk about how many things could go wrong in this. And my other example is, there’s a home that we know that we walked in and looked at. I’ll never forget pulling up to, it was beautiful. It was just like I’m talking about. They bought the dirt, they spent like 500, [inaudible 00:10:28] here we go, 900,000. I’m sorry. Yeah. And they spent $900,000 on the dirt. That’s right. And I think it might have, I don’t know if it was a dirt or a tear down, doesn’t really matter. I don’t know what was there. And they, basically though, they ground up, built something new, and put it on the market for 6.5. We were walking up to the open house and I was trying to find the front door.
Jill DeWit:
I’m like, something’s wrong with this picture. It’s because the pool is in the front yard. The way the view is and the way you want to see, the wat you want to look at the view, you have to kind of twist the house a little bit on the lot. And I’m like this isn’t right. Well, I went back and looked at it, and this is an example of all the things that couldn’t go wrong. It’s the spec home, and they did it. And they’ve been trying to sell it since 2017 and they still haven’t sold it. So there is one- [inaudible 00:11:16]
Steven Butala:
In the hottest market in the real estate history.
Jill DeWit:
Exactly. And it’s a beautiful home.
Steven Butala:
In a, hottest national market, in this country’s history, in the top three hottest towns.
Jill DeWit:
Yeah.
Steven Butala:
In the Phoenix area, and they can’t sell the property.
Jill DeWit:
Yeah. And I’m sure they sold them all the things that this other spec home, I want to tell you, that’s where that’s being built now is happening. And so, boy, if I was a lender, whoo, I’d be watching that one. Right now sweating it.
Steven Butala:
So here’s a point. You have choices. As an investor, you have a lot of choices about what to do with your money more than ever. You have choices. Now, you can go to Vegas. You can go to the stock market and start trading. Those two things aren’t that different. But you can do what we do, which makes sense to me for some reason. You can send out a mailer, a very well thought out, well priced mailer. Blind offer mail campaign for houses or for land, that are materially undervalue for what you know you can resell the property. So now there’s like nine things we already know. We know where we’re sending it. We know how we price it. We know that we’re sending prices that are maybe 80% less in some cases, 70% less what the market value of the property is. We know how hot the market is, because we went through the Red Green. You always has to. Check the list, by checklist, by check on this list, we’re reducing risk. So, no property comes back in.
Steven Butala:
As if that’s not good enough, all these letters go out. The 10 or 15 people that decide they’re sellers, you didn’t decide that they were, they decided themselves at they’re sellers. They come back, and whether Joe talks to them on the phone or they just signed the offer and it comes back and you’re staring at it, you check to see. You check, you have the purchase agreement in your hand. You check on the internet to see whether or not you’re going to make any money on this thing. Well, how do you know if you’re going to make money? Let’s remove the check, the final check on the checklist. Am I actually going to make money on this? Well, I have an purchase agreement in my hand for $42,000. I think that was this today, or yesterday. All the properties around it are selling for $200,000. Is this a risk or not? I don’t see any risk at all.
Jill DeWit:
Exactly.
Steven Butala:
None.
Jill DeWit:
That’s my whole point here. We sleep really well at night.
Steven Butala:
And if I do, and this happens often in real life, I don’t see a risk in the deal or the pricing. We’re all done with that. The seller is a willing seller. They chose himself, I didn’t choose them. Nobody’s selling anybody anything, but maybe there’s access. Maybe there’s one little thing. That, I don’t know if there’s access to this property or if there isn’t. In three phone calls I figure that out, I find out there’s access. So now, in my opinion, this is about as riskless as you can get. And a spec home is about as risky as you can get in a real estate environment. Why not build an office building that’s empty and see if you can lease it. It’s about the same level of lack of intelligence in real estate that I…
Jill DeWit:
Don’t even go there with me. Don’t even start. Let’s end it on that.
Steven Butala:
There’s a concept called, air quotes, for sale real estate. You never want that.
Jill DeWit:
Nope.
Steven Butala:
You never want to get your head behind for sale real estate or for lease real estate. And I completely agree with that.
Jill DeWit:
Happy to join us today. I’m going to save you right now.
Steven Butala:
Save me?
Jill DeWit:
Oh no, I’m saving… No, not saving you. I’m saving our listeners. Five days a week, you can find us here on the Land slash House Academy Show.
Steven Butala:
Tomorrow the episode on Land Academy Show is Jack Thursday, and I’m going to talk about the challenges of the times we live in. You are not alone in your real estate ambition.
Jill DeWit:
I hope it’s very uplifting because the show’s going to drop on Thanksgiving.
Steven Butala:
It’s very very positive.
Jill DeWit:
Oh good.
Steven Butala:
Every single point that I have to make is positive.
Jill DeWit:
Oh good. Okay. Thank you for tuning in. By the way, we would love to connect with you and we are on Clubhouse. Go find us. So, get on Clubhouse, number one, join the land investing club and then follow us and you’ll get alerted when we go live. It’s usually the first and third Thursday at 10:00 A.M pacific time.
Speaker 3:
We’re Steve and Jill.
Steven Butala:
Information.
Jill DeWit:
And inspiration.
Steven Butala:
To buy undervalued property.
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