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VOL. 126 | NO. 65 | Monday, April 4, 2011

Spec Building on Decline as Presale Market Gains Popularity

JEFF IRELAND | Special to The Daily News

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There was a time in the not too distant past that expansive speculative home neighborhoods were going up left and right in Shelby County.

Residential developments with a handful of floor plans were being constructed to take advantage of a large pool of potential homebuyers.

But a few years ago that came to a screeching halt as the real estate bubble burst.

As a result, everybody in the homebuilding business was forced to make adjustments, or get out of the business completely.

The days of huge neighborhoods being built with the hope of homebuyers gobbling the spec homes up appear to be over, at least for the foreseeable future.

It’s a buyers’ market now, and buyers seem to be leaning toward homes built specifically for them.

“It seems like if people are going to spend X amount of dollars on a home, they want to buy exactly what they want,” said David Clark, owner of David Clark Construction LLC, and current president of the Memphis Area Home Builders Association. “They’re not going to settle for what’s on the market if they’re going to spend all that money.”

Clark said he has noticed this trend developing the last two years. His company has made adjustments to give homebuyers what they want, but he has been surprised that things have gone this way.

“Honestly, you’d think there would be more sales on presales because there’s more of a bargain with that,” Clark said. “People have more bargaining power with existing homes because homeowners are desperate to sell, but that hasn’t been the case.”

Clark has also noticed homebuyers requesting more green features in custom homes in an attempt to increase home values, a trend growing in importance.

“It seems like everybody wants to know about tankless hot water heaters,” Clark said. “If you’re going to be in your home for a while, it’s a good return on your investment. If you’re not, it’s probably not.”

Tommy Byrnes, vice president of Byrnes/Ostner Investments, has been in the custom homebuilding business for years, so his business has not had to make a drastic reaction to the trend.

But he has observed others who have.

“Certain builders have adjusted out of the spec market,” Byrnes said. “I’ve definitely seen some other builders, other competition come into the (custom homebuilding and remodeling) market. I’ve seen other builders completely move out of the market. … The problem is because banks just aren’t lending money. It’s very difficult to get a construction loan unless you’ve got a buyer there.”

Byrnes has also noticed an uptick in the amount of people who have a desire to remodel. With decreased home values making it difficult to get a reasonable sales price, many people have decided to improve what they have instead of selling and buying a new home.

He said that many people’s reasoning is that making improvements to one’s home will increase value down the road when the market will hopefully improve.

“You’ve got willing buyers, but they can’t sell their home,” Byrnes said. “They want to add on to what they have. You’ve got people that go ahead and add that fourth bedroom instead of buying a four-bedroom house. I’ve seen that certainly, and a lot of it has to do with the housing market.”

John Duke, the owner of John Duke Builders, hasn’t given up completely on spec homes. He and two other companies recently bought six spec homes in the Enclave Subdivision in Germantown.

Duke tries to keep his business fairly balanced between spec homes, custom homes and remodeling jobs, but spec homes are growing harder to come by.

‘There’s not many (spec builders) left out there like there used to be,” Duke said. “A lot of them have gone out of business. It’s a lot harder to get a loan now. The government made sure of that.”

Duke is currently working on several presales.

“The homeowner took out a construction loan on one,” Duke said. “They know unless something drastic happens the financing should be fine. In that case the builder doesn’t have any risk. … People are still scared what the market’s going to do, so they don’t want to stick their neck out.”

PROPERTY SALES 106 318 6,336
MORTGAGES 131 363 7,084
BUILDING PERMITS 178 482 13,795
BANKRUPTCIES 40 208 4,301