[MRM]

Denis, I know a lot about building high end houses on spec. Call me if you'd like. There are two keys to making money doing it. The first is to build on an absolute premier lot. Location is everything. People will pay extra to get the location they want. They won't pay extra to get a nicer than normal house in a poor location. The second is that the cost of land acquisition drives all economics on the project. Everyone knows what a finished project will be worth on any given piece of land, and everyone knows about what their cost of construction is. The competition in the marketplace drives the price of land up to the point that it is just barely worth it to a developer to take the risk. If the land is priced lower it sells before the rest of the market knows about it or it gets bid up to market level. If it's priced too high the land sits on the market.

So to get a deal that will allow you to make a good return on the project, you have to know something that the rest of the market doesn't. Either there is some hair on the property that the market is overreacting to and you know you can resolve for less than the discount the land is giving to the marketplace, or you have to know how to put something with more value onto the lot than the rest of the market, or you have to know that your cost to build is less than the rest of the industry. If you can work with an architect who can produce a unique value added design on a premier property and do a lot of the work yourself, you might be able to do well.

I know a builder in Florida whose business plan calls for buying ocean front lots on Palm Beach Island and building spec mansions. As one example, he spent $10 million on one lot and spent $6 million building a 20,000 square foot main house and a smaller carriage house. He then sold the house for $42 million. That's the kind of land to improvement ratio you're looking for to have a sure thing. This builder later went bankrupt when he did a project where he bought a less than premium lot and over-built the house to try to make up for the lot location. People will buy a location and customize the house to fit their tastes, but they won't buy a fabulous house and change their taste to fit the location.