Just about any of you who live in freehold houses, in areas with detached homes, will be able to relate to the following anecdote…
There’s a bungalow on your street. Or a 2-storey, detached, in original condition.
Maybe the property sells on the open market, or maybe it changes hands privately. Either way, one day you’re walking by and you see the metal fence wrapped around the property, and you know this house is about to be built anew.
The existing brick dwelling is torn down, and a massive hole in the ground appears next.
Workers come and go, trucks clog the street, and while you probably don’t witness the concrete foundation being poured below-grade, you certainly take notice when the timber frames go up at eye-level.
A couple of months later, the roof goes on, and then some windows, shingles, and it starts to look like a house.
Go out of town for a week, and miss a lot! The entire house is bricked in mere days!
The house looks “finished,” but there’s still a lot going on inside.
The dumpster disappears from the front of the house, and that dirt underneath is replaced with flagstone or interlocking-brick.
Fresh sod is put down, and soon thereafter, the “FOR SALE” sign goes up on the front lawn.
And then nothing happens.
The house sits there, as does the sign, for week after week, with nothing happening.
Weeks become months.
The “FOR SALE” sign changes colour and size, maybe twice, or three times, and it seems to go up, then down, with periods when there’s no sign at all.
Finally, one day, ten months after this property was finished, there’s a “SOLD” rider adorning the top of the lawn sign.
And then the whole sign comes down mere days later. Bittersweet, pseudo-victories don’t last long.
How many of you have witnessed this before?
Every single one of you, if you’re paying attention, have a house in your area that was built by a “spec” builder, didn’t fare well on on the market, and sat for a short eternity.
Reputable, experienced, high-end builders will sell their projects, and they often do so at or above their list prices, in this case legitamately for more than they expected.
But the “other” builders have a miserable time out there, and I see the same thing, time and time again. They just have absolutlely no clue what they’re doing.
Building a house and selling it for a profit in Toronto, despite what you think is difficult.
You pay hefty land transfer tax on the purchase, real estate fees on the sale, legal fees on both, and then you’ve got permits, architecturals, and often zoning applications, not to mention construction financing, all irrespective of actually building a house.
Let’s say, for argument’s sake, that you purchase a piece of land for $1,200,000, build a house, and look to sell for $2,500,000.
The land transfer tax is $40,950 on the purchase.
The real estate fees on the sale, depending on the commission, could be as high as $141,250 with HST.
Legal fees are probably $10,000.
An architect is $20,000 – $50,000, depending on whether you actually do your job, or just hire your cousin’s friend.
Permits are into the tens of thousands, and if you go to the Committee of Adjustment, you’re in for even more.
Hire a designer? There’s $175/hour.
And construction financing is 8.25%.
So let’s assume this $1,200,000 piece of land is a 30 x 120 foot lot, and you’re building 2,400 square feet above grade. You’re $250 per square foot, minimum. That’s $600,000.
All told, you’re in for a million bucks, before financing.
And depending on how much cash you actually put into this project, you might have as much as a million dollars out at 8.25%. That’s another $80,000 for the year it takes to get through permits and zoning, then build the house, sell it, and close it.
Where is the profit here?
We’re looking at $200,000 only if everything goes right.
I can’t tell you how many amateur builders I see that lose money. No anecdotes here, folks. I showed two houses on the weekend, both where the current asking price of the house is at, or below, the builder’s “all-in” cost.
The first house I actually really liked, and I think my clients might buy it.
But the second house was just awful, and I feel really, really bad for the builder, who showed up in person to show us the home. (it’s currently off market as he’s switching agents). This guy is going to lose at least $100,000, but realistically up to $300,000.
So what does one of these properties look like on MLS?
I won’t use anything current, since I actually plan to write about these, so here’s a couple from a blog I wrote last year:
Time and time again, I see these spec-houses come onto the market with much fanfare, and then die a tragic death upon the sale.
Believe it or not, they’re almost always the same.
I’ve crafted a list of ten reasons below, have a look…
10) Wrong Lot.
Simply put, some houses should just never end up as “spec houses,” but that doesn’t stop some builders from trying.
Let’s say a bungalow is located right next door to a low-income housing building, and the residents like to hang around out front, showing off their bellies in the hot summer sun, drinking king-cans, and yelling at the trees.
That is a reason why prospective buyers, when visiting this “wonderful, brand-new, expensive” builder house, will eventually get back in their car.
But that is also a reason why the builder shouldn’t have picked this project in the first place.
Some builders try to fit a square peg into a round hole, but it’s either a case of, “I’m the only person with the genius to pull this off,” or unfortunately, “If it was worth doing, somebody would have done it already.”
In these cases of unsuccessful builder spec-homes, it’s always the latter.
9) Wrong Finishes.
There’s this age-old real estate saying that I heard in my first month on the job: “You don’t buy a condo, based upon the size of your couch.”
Your existing couch, in your rental apartment, that your grandmother gave you, should not impact whether or not you invest $275,000, er, today I guess it’s more like $650,000.
This is truly an example of “sweating the small stuff.”
So when I go inside a builder house, and the range isn’t a WOLF, I tell my clients that this alone is not worth nixing the house over.
However, when these unexpected, and unspectacular finishes add up, in every room, it’s not only enough to collectively devalue the house, but also to wonder what else the builder skimped on.
Thermador makes a great gas cooktop, and even though everybody wants those maroon burner-handles on the WOLF range, other manufacturers, such as Kitchen Aid, now have high-end lines.
But if you go inside a $2,500,000 house, and there’s a glass cooktop, with halogen burners, sorry to say – buyers are turned off.
Extrapolate that one example across the board, from kitchen appliances, to light fixtures, bedroom and closet doors, shower hardware, etc., buyers feel the house is “cheap,” no matter how well-built it is.
8) Ceiling Height
Man, we’re really talking about first-world problems today, aren’t we?
A newly-build house should have at least 9-foot ceilings on the main floor, but often 10-foot, and maybe even 11-foot.
So when you walk into a “new” house and the ceilings are 8-feet, you want to turn around and walk out.
I know, I know, first-world problems. But work with me here!
You’ve seen five or six houses in the $2,500,000 price range, and they all have 10-foot ceilings on the main floor. Then you walk inside the next house, and the ceilings are 8-feet. There is absolutely, positively, zero chance that you purchase that house. It doesn’t matter how nice the rest of the house is, you won’t purchase the house.
Unless you’re a huge John Malkovich fan…
7) Crummy Basements.
To continue on the theme above, buyers of $2-3M “new” builds are looking for basements with ceilings that are higher than whatever was there when the original structure was build, whether that was 1956 or 1887.
Buyers want an open concept rec-room; one without bulkheads running down the centre of the room, necessitating a bobbing-and-weaving like a boxer ducking under ropes, and they don’t want pillars and support columns.
They don’t want an underpinned basement with the “bench” sticking out from the wall, thereby killing about 15% of total square footage.
They don’t want those Harry Potter closets all throughout the space; remnants from whatever was there, before you build this half-assed “new” basement.”
Buyers want a large rec-room with high ceilings, a guest bedroom, and a large washroom. More on this later.
6) Not a “New” Build.
Take the points from #6 and #7, combine them, and you’ll probably learn that these houses are not entirely “new.”
In the mid-2000’s, builders would always tear down the whole house but save the two side-walls. Remember this? You’d drive by a construction site and see those two side walls, and wonder why they left them.
1) So they could call this a “substantial renovation” and avoid paying HST.
2) Because the two side walls were further out on the lot lines than any “new build” would allow today.
Point #1 is all but irrelevant today, as the CRA has cracked down on this practice.
Point #2 is still quite relevant.
However, and this is a HUGE however, if the builder used the two side walls but also used the existing foundation, then you’re going to end up with a short basement and lower ceilings on the main and second levels, compared to what a true “new” build would permit.
Think back to the 1980’s when the “top-up” was all the rage. Take a bungalow, add a second-storey, and voila! “New” home!
Today, buyers of high-end builder houses want the house all new, especially the foundation. They want that deep basement, open concept, no supporting walls, pillars, or columns. They don’t want to step up 16-inches and duck their head to go into the cave-like bathroom.
Spec-builders continuously use existing foundations, creating crummy and chopped up basements, and leaving short ceilings on the next levels, and trust me, the buyers notice.
5) Bedrooms Too Small.
Simply put: if the house you’re building should have three bedrooms, but you feel that there’s far more value in building four bedrooms, take a moment to evaluate the pros and cons.
A new-build on a 30 x 120 foot lot that has four bedrooms does not automatically convert to the same house, only 16.67% smaller, on a 30 x 120 foot lot.
Many builders who are too cheap to hire architects will just borrow plans from a friend, take out their calculator, and shrink each measurement by 25/30.
But when you finish your four bedroom house, and two of the kids bedrooms feel like closets, and the “master” bedroom can barely fit a Queen, then you should have just build a luxurious 3-bedroom house.
There are several of these on the market right now.
4) “Master” Is Lacking
To continue on the point above, buyers are purchasing “family homes” for their families, no doubt. But Mom & Dad want to get what’s good, right?
I was in a house today where the master bedroom closet was a double closet, which you would find in a condo bedroom. Seriously. For $2,600,000, the lucky buyers had enough room for the same amount of clothing, shoes, purses, et al that they owned when they were living downtown alone a decade ago.
Again, first-world problems, I know.
But the kids aren’t buying this house, so it doesn’t matter that you’ve got that cool jungle-gym in the backyard. Mom & Dad aren’t going to turn the 4th bedroom into a closet, otherwise they’d have just spent $300,000 less and bought that “true” 3-bedroom house, with all the luxuries it afforded.
A master ensuite bathroom in these houses should have a separate tub and shower, whether you use it or not. Double-sinks are almost always present. 6-piece bathrooms are the norm, so imagine the $2,549,000 house with a 3-piece ensuite in the master?
Good luck! Maybe think this one through a little better on your next project, eh?
3) Miserable Exterior.
Here’s a really childish example, but here goes…
Remember when you were single, and your friends wanted to set you up with somebody? Your friends went on and on about what a great guy he was, how successful he was in his line of work, that he loved his mother, and he was a great uncle to his nieces. But then your friend showed you a photo, and you just tapped-out right there.
Sorry, but there has to be at least some level of attraction to the “outside,” be it a person, or a house, before you can really like what’s on the inside.
I’m sure we can take that example a lot further, like that buddy you had, who dated that girl, who made him shave his trademark beard, part his hair a different way, stop wearing visors, scrap the silver chain around his neck, wear clothes that she picked out for him, and speak in a different tone, all the time. But like I said, who wants to go there? Let’s just move on. Right? RIGHT??
Curb appeal, folks!
You’ve got to have curb appeal!
And oh-so-many builder houses don’t fit with the area! If a street in a particular neighbourhood features primarily red-brick homes, why are you the builder who decides to use stucco and angel-brick? Ew!
Sure, maybe red brick costs more than stucco, but you probably don’t think you’ll sell for any less (hint: this is in point #1).
You know those super-modern, “California-style” houses that you popping up from time to time? I have far more clients who hate those than who love them, so why in the world would a builder use that design? I’d rather appeal to seven people than one, especially when there’s nothing like that design in the whole area.
I can’t tell you how many times my buyers pass on a house because it’s not their style from the outside.
2) Major Design Flaw.
The common theme here is “know your buyer pool.”
More specifically, “know your demographic.”
Buyers of $1,200,000 houses in Toronto right now are dying for basement apartments so they can help pay down their mortgage. This is one of the hottest property types in the city.
But do you know don’t want basement apartments? Buyers of $2,500,000 family homes in somewhat affluent areas.
Sure, I suppose one or two out there have a live-in nanny, but a 5th bedroom in the basement will suffice. And those nannies don’t live in the house forever. Buyers of $2.5M new-construction are all looking for the same basement: rec-room, 5th bedroom, bathroom. Rec-room, 5th bedroom, bathroom. Repeat.
Rec-room, 5th bedroom, bathroom. Repeat.
This is so simple, and yet so many builders screw this up.
I’m looking at two “spec homes” that are sitting right now, around this price, both with basement apartments that the buyer pool doesn’t want.
Builders have to know their buyer pool, otherwise they spend money on things that buyers don’t value, and would actually spend their own money on, to remove.
No surprise, this is number-one.
“Builder knows best,” right?
Every builder is like a parent who thinks his or her kid is the smartest. Trust me, I know. Because I think my kid is the smartest. And cutest.
The reputable, experienced, high-end builders that I credited at the onset do know value, and if they usually price accordingly.
But as you saw from the listings above, the “spec” builders no not.
I was driving through my neighbourhood last year, and I saw a house under construction. It was a corner lot, which is always hit-or-miss, but this house was long and narrow, with little backyard, and an unnecessary and unusual two-car garage that was just way too big for the lot.
My wife asked me, “What do you think that’s worth?” I told her probably $2.6M or thereabouts.
Sure enough, this house was listed for $3 Million, and sat for month after month, with multiple price drops, and multiple agents, before it finally sold.
As I wrote in a blog last year called “Why Do Builders Price Differently?” many builders do have a strategy around pricing. But most don’t.
The top three reason:
1) They don’t know the area.
2) They get emotional and caught up in “their” house.
3) They over-spend, and decide they “need more” for the house, even though the market doesn’t care what a builder needs.
So if you’re in the market, and you see builder spec homes that aren’t moving, refer back to this list.
Whether you go inside the house or not, I’m pretty sure you’ll be able to identify at least a handful of items on this list…Back To Top Back To Comments