This week I want to talk about the difference between a custom home and a “spec home.” My broker associate in Cedaredge, Robert Gash, has built several custom homes on the Front Range.
“A custom home is built specifically for a buyer who has chosen a particular design, a building lot and all the materials, fit and finishes inside that home,” Gash explained. “A spec home is a home that is built to appeal to a much wider audience. It is a speculative venture that is built to sell quickly because it has high market appeal. You can build a high-end spec home that is also a custom home, but you’d better know your market very well.”
We live in an area that offers thousands of very unique properties, and it is actually uncommon for one property to be just like another. A spec home might appeal to a certain buyer demographic. The typical spec home might have three bedrooms, two baths, large living room and easy access to schools and shopping for a family with two or three kids and two parents working outside the home. This is a property that is easily marketed and re-sold once the decision is made to move, find a larger home for a growing family or downsize once the kids have left the house. On most occasions, this home will result in a profit for the owner once it is sold.
A custom home, on the other hand, can have all kinds of different features that another buyer might or might not want, and the market can respond either positively or negatively. We’ve seen a wide variety of custom features — some that are really cool, and others that are head-scratchers. We sold one in Ridgway last year that was quite a place — 13,000-square-foot home, 5,600-square-foot “toy barn,” mesquite cabinets, black walnut floors, cypress siding, essential oil infused steam showers. We’ve seen bears carved out of newel posts on the staircase. We’ve even seen some wild stuff like a Western town and dance hall combined with a custom woodshop.
We often encounter a scenario with an elderly seller who has been very successful in a previous business. He is now retired, becoming immobile, and has to downsize. He built the property himself, with all kinds of custom touches that may or may not matter to a buyer.
“The engineer designed the footers to be 24 inch wide with four sticks of rebar,” he’ll say, chest puffed out proudly. “But I built them 36 inch wide with eight sticks of rebar!” As if over-engineering anything ever benefited anybody.
Then there are things that don’t matter anymore. “You see those touchpads on the wall? I put eight miles of wiring in this house for surround sound!” You hate to tell a guy that it doesn’t matter anymore, WiFi has made all that wiring obsolete. Regardless, the seller is very proud of his efforts, and wants to be paid back for every dime he has invested in the property — plus interest.
Do you know that verse in the Bible, “Pride goeth before the fall”? That is often what happens with a true custom home. One of my friends has a property listed In southern Colorado. It has a Western theme to each of the bedrooms, complete with custom-forged ironwork commemorating each theme — the gunslinger room, the railroad room, the Native American room, etc. That seller spent a fortune on each of those rooms, and on the house in general. It was built for exactly what he wanted, and he had a great time building it. And then he died. Now it’s left up to his widow to sell it.
The chances of finding exactly the buyer who is thrilled about each and every custom touch in this Wild West home are very slim. The eventual buyer may want to tear it all out and start over with a complete remodel. That means there is little chance of recovering the money spent on the custom additions to this home, and it has to be priced accordingly.
Justin Osborn, a colleague of mine, is the past president of the Colorado Realtors Land Institute and sells a lot of custom homes in the Durango area.
“On average,” he said, “when someone has built a really custom home, they can expect to take a haircut of 20-25% when they sell it.”
Trust me, that is not what owners of custom homes want to hear.
“Think about it,” siad Gash, who just sold a custom home in Dillon for $1,400,000. “When people are buying high-end homes, they want things their way. The home may have black granite countertops, and the wife may hate black countertops. The home may have a huge trophy room with places for trophy mounts such as lions, gazelles and caribou. The next owner may want to convert it into a yoga studio. So there will naturally be some changes made to these custom homes, which will negate the value of some of the improvements.”
Another thing to think about is what people really need. Any of us can get by while living in a suitable RV, as long as the heat comes on, the toilet flushes and the pipes don’t freeze. Almost all of us would prefer to live in something more spacious and comfortable. We need a primary residence with heat, water, light and enough space to cook, clean up, relax and sleep. A basic home might be a 1,300-square-foot three-bedroom two-bath fixer-upper built in 1965.
When considering custom homes, nobody needed that 13,000-square-foot home on a mountaintop near Ridgway. That’s why they’re harder to sell — the Telluride crowd gave it their best shot for 10 years. Many people may think they want such a home, but when it comes time to cut the check, that buyer pool is relatively small. On this same theme, we have to think about our properties in Western Colorado and Delta County in particular, and ask ourselves if we have a truly custom or high-end product and why should a buyer pay us extra for it.
That’s why the builder of high-end spec homes has to be very attuned to the market. They have to anticipate those cool little features that everyone loves, but they don’t want to waste money on things that people don’t appreciate. Some things are just expected, like a certain quality of windows, doors and plumbing and lighting fixtures. Other things are intangible, such as the views, the setting, and the neighborhood. When people see high value, they’ll pay higher prices.
Personally, I think some guys just have a lot of fun building something. They get a cool idea and think of how they can integrate it into the home that they’re building. Nobody put a gun to that one guy’s head and made him build a 6,000-square-foot woodshop and then build a dancehall above it. He just thought it would be cool, and he built it for himself. But boy, did he build a white elephant.
I’m not the guy who will tell you to always build for re-sale. If you want pink walls in your bedroom, then by golly, paint it pink. But when it comes time to sell, you’d better invest in a couple gallons of white.
When selling a truly custom home, that’s when it’s time to kick the marketing program in high gear. Think about it — who would try to sell a multi-million-dollar asset — cars, antiques, heavy equipment, horses or livestock — without a marketing budget? Why would real estate be any different? When we list high-value properties, we sometimes ask for a fairly significant upfront marketing budget so that we can present the property in a wide variety of marketplaces, bringing the sale to a quicker conclusion. That’s when the market will tell you how it really values a custom home.
Gary Hubbell, Accredited Land Consultant, writes about real estate, agriculture and politics. He is an accredited land consultant with United Country Colorado Brokers & Auctioneers. For more information, visit uccoloradobrokers.com.