When it comes to residential construction, one of the biggest distinctions builders face is whether to develop spec homes or custom homes. Each approach has its own advantages, risks, and financial implications. In a recent discussion with Jeremy Perkins, a successful home builder and developer, we broke down the core differences, financial strategies, and long-term investment potential of each.
What’s the Difference Between Spec and Custom Homes?
At its core, the difference is simple: speculative (spec) homes are built without a specific buyer in mind, while custom homes are built for a specific client with their direct input.
Spec Homes: The Gamble with a Potential Payday
Building a spec home means a contractor is taking on the risk of financing and constructing a home without a guaranteed buyer. The term “spec” comes from the word “speculative”—you’re speculating that someone will buy the finished product. Here’s what that looks like:
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You purchase land, build a home, and put it on the market.
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The process can take 6-8 months (or longer), during which you’re footing the bill for materials, labor, and financing costs.
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If the home sells quickly, you get a lump sum profit. If it sits on the market, you’re covering holding costs until a buyer comes along.
According to Perkins, spec homes fall into the category of “medium money”—you invest upfront and, if all goes well, you get paid months later. However, there’s always the risk of market fluctuations, supply chain delays, or buyer preferences shifting before you sell.
Custom Homes: A Safer, Steady Cash Flow
Custom home construction, on the other hand, involves a pre-sold contract where a client approaches a builder to design and construct a home tailored to their needs. The financial model for custom homes is completely different:
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The builder works under a contract, often cost-plus (e.g., cost of construction plus 20%).
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Payments come in regularly (usually weekly or monthly) as milestones are reached.
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There is little financial risk since the builder isn’t fronting the capital—funds are coming directly from the client.
This steady stream of revenue falls into what Perkins calls “fast money”—you’re consistently paid throughout the project, which helps maintain cash flow for your business.
Which Is the Better Business Model?
Neither model is inherently better; it depends on a builder’s risk tolerance, financial position, and long-term goals. However, successful builders often incorporate both strategies to balance cash flow and long-term investment potential.
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Spec Homes: Higher risk, potentially higher reward, but requires upfront capital and the ability to weather market downturns.
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Custom Homes: Lower risk, consistent income, but less flexibility in design and potential profit per project.
Many experienced builders, including Perkins, use a combination of both to fund future projects and grow their business.
The Role of Quality and Subcontractors
Another interesting takeaway from our discussion was that quality remains a priority across both spec and custom homes. Perkins noted that even in his spec homes, he uses the same trusted subcontractors as in his high-end custom projects. This ensures a consistent standard of workmanship and maintains a strong reputation in the market.
That said, luxury custom homes often require specialty suppliers and materials—such as imported stone, high-end cabinetry, or intricate architectural details—which may differ from the materials used in more standardized spec homes.
The Bigger Picture: Long-Term Financial Strategy
Beyond just spec vs. custom homes, Perkins shared an insightful approach to financial strategy in construction:
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Fast Money: Custom homes and weekly paychecks from contract work keep cash flow stable.
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Medium Money: Spec homes take time to develop and sell, but when they do, they bring in larger sums of profit.
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Slow Money: Investments in real estate development and long-term rental properties provide passive income and long-term financial security.
Perkins’ ultimate goal? Be the bank—by reinvesting profits wisely, leveraging capital, and positioning himself for financial independence through long-term property holdings and self-financing.
Final Thoughts
For contractors looking to build a sustainable business, understanding the difference between spec and custom homes is just the beginning. The real key is balancing risk and reward, maintaining steady cash flow, and thinking long-term about investment strategies.
As the market continues to evolve, successful builders will be the ones who master this balance—adapting to market demand, securing reliable subcontractors, and leveraging financial strategies that ensure continued growth and profitability.