Underspec'ing a Build: The Costs You Don't See Coming (EP42)

Trust the Process Podcast | Season 2, Episode 42 | 31 min | with Krista & Michael

Episode Summary

Building a home involves hundreds of decisions, and not every cost-saving choice carries the same weight. In this episode, Krista and Michael pull back the curtain on "spec level" — how much to invest in a home's finishes and components — and the hidden risk of under-spec'ing and over-correcting in a softer market. They talk candidly about homes where they missed the mark, why certain choices move both your budget and a buyer's perception, and how they're calibrating spec levels across their Southern Nevada communities. An honest, practical look at balancing cost, quality, and long-term value when you build to sell.

What We Cover

• Spec level vs. product type: what you can and can't change once a build is underway

• The finishes that move the needle: appliances, cabinets, windows, doors, and drywall/stucco texture

• The risk of under-spec'ing and over-correcting in a soft 2025 market

• Discretionary luxury buyers vs. aspirational buyers, and how that changes the build

• The appliance-allowance idea: using a set budget (around $40K) as a sales tool

• Passion, standards, and margin: finding the highest and best use for every project

Listen to This Episode

• Spotify: https://open.spotify.com/show/6peFOj0aDX9bQ3zASkhfap

• YouTube: https://www.youtube.com/@TrustHomeBuilders/podcasts

• Also available on Apple Podcasts and all major platforms.

Full Transcript

Krista: Welcome back to Trust the Process, the podcast where we talk about new home construction, the real estate market, development, and all things in between. So welcome back. Hi, Michael. Thank you guys for being here. Today, Michael and I have been on a call for a little bit, chatting through some things, and we had a few ideas that might interest you. So we thought we'd turn on the cameras and bring you into the conversation. We're talking today about

Michael: Hello.

Krista: spec levels, some of the new communities we have going in, our existing communities, and the homes we've built over time. What we're putting into them, and what the market's dictating in terms of how much we should put in or how little. There have been a few homes that we kind of missed the mark on, and where that took us, how it happened, and the lessons we learned from that. The decisions being made based on history and what we're learning as we go. So that's what we're going to have a conversation about. And I know you have a lot to say about this, so jump in, Michael.

Michael: Yeah. Well, thank you. Quite a lead-in.

Krista: Take it away. I know this keeps you up at night.

Michael: Besides raising funds for development and raising loans and all that, it's probably the other 75% of what I do. That's a lot.

Krista: It is. It holds a lot of bandwidth in the big picture of what we do.

Michael: It does. So, spec level, yes. The reason we're talking more about spec levels: that's downstream from product type. We've already determined product type, and that can be very challenging calculus to figure out, what goes there, how big, certain things you can and cannot change, structural things, architectural styles, ceiling heights. Things that are very hard to change once the train leaves the station on the architecture.

Krista: Right.

Michael: But ultimately the spec level moves your budget more, because you could have a $50,000 appliance package or a $10,000 appliance package. You could spend $10 a square foot on drywall finish or $5 a square foot. So you can really ratchet that up. Versus square footage, an extra bathroom or kitchen, an extra bedroom, those square footages aren't as expensive in the scale of the entire build. The vast majority of our business is built to later sell. So we're trying to thread the needle in the market and tailor-make this product, including the spec level, for where the market is going to be at the time the house is ready. Hopefully building a compelling product that is not over-specced but is specced enough to make that discretionary buyer jump. The majority of our buyers and our demographic are discretionary buyers. They do not need to buy. They may already own a home here, or it's a second home. So, speaking more to our luxury product, we want these homes to be compelling. If a buyer is coming from a $2 million home, they already have a Thermador or Viking appliance package, a Sub-Zero. They're used to these things. They're asking why a builder at $2 or $2.5 million wouldn't put these things in. We're trying to court that buyer, so you're dealing with a pretty refined buyer at that point. Under $2 million is more of an aspirational buyer, so you get away with a little bit more.

Krista: Right.

Michael: And you're also trying to keep that price point in the low two millions. So you do need some alternatives. It costs more labor and material to do X, Y, and Z versus an option that will keep the price in the one-sevens or one-sixes.

Krista: Right. And in reverse, there are some things you could do that aren't going to move the needle too much on total price. While it's a little bit of labor, we get to that place and we're like, why not? It may or may not be a tipping point for that buyer when we find them, but for us it's that moment to say, we're here, let's just upgrade this or add this or make this accessible. So it's both.

Michael: We're here, let's do it. A lot of that's components. Good examples would be our 5.1 surround sound, ambient sound, smart-home wiring, wiring for cameras.

Krista: Perfect example.

Michael: They don't really move the needle much. We give our electrician so much business that they don't nitpick us. We pre-wire for four cameras at the corners of the house. So we're just like, might as well go ahead and do it. And if the buyer says, where are the cameras? we'll buy the cameras as part of the contract. So it's a lot of those little niceties. We do that a lot with insulation and energy efficiency too. We'll say, we're already going to spend $10,000 on this, the better option is $11,000, let's do that, because we don't build at the kind of

Krista: Right.

Michael: volume that the big production builders do, where a thousand dollars over a thousand houses would add up to a lot of money. So we like to add things when we can. But ultimately we still have to be smart and careful with how we spec the landscaping, pools, appliances, cabinetry, and fixtures. Those things really move the needle. Windows, for instance.

Krista: Right.

Michael: The type of drywall texture, type of doors. There are a lot of little things where the exact same house could go from, say, $300 a square foot to build to $350 a square foot to build, very simply, with about four different vendors. You chose this appliance package, this cabinet package, the different plumbing fixtures, and now you have a 20% swing on build costs but you may have only moved the sales needle 7-8%. So that's the calculus you have to do to figure out where the sweet spot is.

Krista: Yeah.

Michael: I erred on the side of over-speccing for many years and then pulled back, and I think I've under-specced some of our current stuff. I think some of it's a little under-specced.

Krista: And that's the balance. We're building the house, and production starts so far before it actually goes on the market. Until it's a completed home ready for occupancy, so much can change. 2025 was a perfect example of that. Some of those homes we started at the end of '24 into '25, when it was a little softer, by the time you close them out you've pulled back some of your spec levels and would have gotten away with higher spec levels by the time the market reheated. But you don't know that.

Michael: It's so far upstream. Yeah. It kind of equilibrated.

Krista: And you can't predict those things, so it gets tricky. Even though you decide on the front end what's going to go in, sometimes you get to that moment and it's time to pull the trigger and you're like, let's just step back. I think that may have happened in some cases. Out of caution, the market was calling for a slightly lower price point and a little bit

Michael: Yeah, because these were...

Krista: less upgrade, so we went in that direction. And then six months later when the house actually hits the market you're like, darn, I wish I could have seen this crystal ball.

Michael: Less sizzle? Definitely less sizzle. When we have our inventory, pretty much once they're at slab, we put them as available on our website, and our agents are showing them too. They were out there on Zillow, because they're on our BDX platform. And when you're not getting calls on them, or the showings you're getting have so many objections on things you didn't even realize were objections,

Krista: Right. Yes.

Michael: things you can't change, like proximity or whatever it is, you're sitting here going, ooh, maybe that wasn't as good of a lot as I thought it was. So I'd say this house being a $2.3 million home, maybe this is a $1.8 million home and I need to adjust accordingly. And maybe it was a self-fulfilling prophecy, because I'd say, what kind of drywall do we actually want to do? which you decide about four or five months before the house is done. And you're saying, do a level three, do a level three, fine, no one's really hot on this house anyway, I'm worried, we need to dial it down. We slowly did that on a couple of homes and by the time it was nearing completion it felt very much like a $1.9 million home, not a $2.3 million home. So I got in my head and overcorrected. And I'd be lying if I said some of that overcorrection wasn't from '22, '23, '24, where no matter what, I was leaning on the side of over-speccing. And I kept thinking to myself, gosh, I feel like that home would have sold for the exact same price had I not spent $73,000 on appliances and $190,000 in cabinets. You think, did I really need to do that? So the pump was already primed to under-spec. I didn't realize it, but it was primed.

Krista: Yeah.

Michael: And then market feedback was basically telling me the same thing. We had a really lackluster 2025 real estate market. So as these homes were going up,

Krista: And going into '25 we already knew there was some change.

Michael: Definitely. A total shift. '24 leading into and all of '25, I felt it. There were some bright spots, but definitely more headwinds than anything. And I made all those decisions then.

Krista: And we're still feeling it to some degree. It's warming up, but we're still a soft market.

Michael: When I started in the business, I was more of a broker at that time, but I was still making these kinds of decisions, even renovations I did to sell, fix-and-flips. Let's say I did 40 houses over a five-year period, it was in the 30s for sure, and there were a lot of decisions. Okay, this house is in Green Valley, this one's in Anthem, this one's in Summerlin, I think we can get away with this, this house is in Centennial,

Krista: Right.

Michael: what's the zip code, what's my competition, what are buyers valuing? And although it's only one house and a little project, you still make a lot of spec decisions. So my point is, when I say over-spec, I don't just mean new construction, I mean the flips. I always over-specced my flips. I'd have a renovation budget of $50-60,000 and a margin of $15-20,000. You could probably have left $30,000 on margin and still sold the house for what you sold it for. So that's where those stings came from. But my point is, when I got into that business, the market was soft. So I earned my grit in a soft market. That's why I was over-speccing, because I wanted to stand out. So I can call on that skill and mentality easily. I feel like we've corrected the ship on all of Serene, upstream from product selection. On Westridge and Argos we're probably overbuilding a little bit, and on Foundry, the things we're doing downtown are probably more than we need to do, but I

Michael: err on the side of standing by a product where I feel like I didn't leave anything on the table. I really maximized that development, and that's ultimately the name of the game, finding the highest and best use for that property. Even if it's a luxury home on a country club, there's still a highest-and-best-use question for that piece of land. It's easy because we already know it's single family, luxury, probably X square feet. But what else would be the highest and best use for that parcel?

Krista: Or a custom builder. We're building custom and semi-custom, and we're now moving into multi-family over time. Categorically, you're custom, you want high-end finishes, you're looking for a luxury product, and buyers are looking for a luxury product. The communities you've built in historically are high-end, on the country club, so people are looking for that lifestyle. So now the mental shift to take some of what we do to

Michael: Right.

Krista: other locations in the valley or other price points, that's a trade. And as a person, you like nice things, so it's hard. We're probably really bad for each other because we'll walk into a showroom and we're like, this is beautiful. We gravitate toward the pretty things, and in design they're expensive. We're not going to put a formica countertop in when we

Michael: We get a solid Carrara marble for $25 a square versus porcelain for $4. Right.

Krista: So it's those kinds of things that other people might be willing to cut corners on that you're just not, regardless of what we're building, even on our townhomes. I know recently somebody suggested, well, what if we did formica? A friend of yours, not in our business, said we should do formica countertops, and you were like,

Michael: I'm not a formica guy, vinyl floors and carpet. I don't think times are that bad. Geez, I don't think it's that bad.

Krista: There's an expectation for who you are as a builder and what you want to do, too.

Michael: Right. That's the bottom line. We talked about this in the last podcast. If you're passionate about it, you have to be proud of the things you put out into the world. I love the restaurant example, I beat it like a dead horse, but a chef, no matter how much he has to watch the bottom line, the best restaurants are okay with some compressed margins because it has to be right. It has to be something they're proud to put out.

Krista: Yeah.

Michael: So that's where I spend a lot of my time. We're also at a point with a lot of our builds in that cycle where it's time to spec. Serene, we're speccing those in real time. And we're already hitting the ground running with our Foundry Square products, so we're speccing windows. I've got bids on windows and I'm changing them all to black. I'm making those decisions in real time and it's definitely occupying bandwidth. We're also dealing with some upstream stuff on other projects that's more set in stone. Are you sure you want 12-foot ceilings? Are you sure you want the RV garage? Are you sure you want 2x6? It's too late on one of them, and the other is still a maybe.

Krista: Is there ever a point where you've circled back on decisions that were made and pulled something out and upgraded it, or vice versa, pulled something out to fit, I don't want to say downgrade, but changed it? I'm thinking about the garage door openers, for instance. We've done the side panel or the above. As time changes and new things come out, the side panel is sort of the new shiny object. Is there a time where you put one in and got to a

Michael: Picked it up.

Krista: point and thought, we're going to change, or vice versa, like this home really doesn't dictate a sales price that could carry this kitchen cabinet package?

Michael: Yes. I've been all the way down to a signed proposal, all the way down to appliances at the dock, and backpedaled on that. And in the last six to twelve months it's been going in the other direction, taking it and bringing the spec level down, which is why

Krista: Right.

Michael: the theme of the episode I figured would be the risks of under-speccing and over-correcting. That's when you feel that sting and you walk through the home that's done and you think, I already did all of this effort, it would have taken nearly the same amount of time, maybe just more time, because let's say level-five drywall

Krista: I love it.

Michael: takes an extra week, the sand finish versus the dash, just little things like that that add to the timeline. And you think, was it worth it? It was the same amount of effort, you walk through and you don't like the windows, don't like the stucco texture, don't like the drywall texture. Those things can really wear on you, and they have.

Krista: Right. Not if they're beautiful homes, because you know the options. You're looking at a level-three drywall, whereas an agent or buyer who walks through isn't necessarily going to pick that up the same way you would, because you're the builder.

Michael: They're stunning. Yes. 100%. Once you know the alternative... and also, I wasn't going in blind. Not only did I have market feedback from the product we're putting out, but I also know what else is available. SouthShore, for example, I know what's available there and in Serene. I know what they're seeing elsewhere, so it should be more than acceptable. But in a market that gets really soft, when you're a builder that doesn't have a big track record or a huge nationwide footprint, you've got to do a little bit more to stand out, to be a compelling product. I look around at these and say, yes, this is in line with the competition, definitely in line with the production competition and certainly better than that. But we need to be compelling in other ways and compete with that nationwide footprint and marketing standard, all the goodwill they've built over the last 25, 30 years. People know what they're getting, and there's a lack of value people place on the unknown. You get a knock for being unknown. That problem is rapidly curing itself, and it doesn't mean we'd dial down our spec level anyway. But when I look at it and say, well, Toll is doing level three, Toll is doing the vinyl windows, and they're offering that as their standard, we're kind of playing catch-up. And you're building specs. You're not building a model home and letting them choose upgrades and showing them the model with every available upgrade to upsell them. You have to just show it on the actual unit. That's the nature of it. It's custom.

Krista: It's a one-off, right? Each one is an individual home versus a model track where they can go hog wild with the model, then walk through and it's, no, that's not included, that's not included. By the time you strip it all out, you're back to a base price. We don't have that option. We can't rip out our model, because our home that's for sale is that one-of-a-kind custom. So that's an interesting one.

Michael: We don't have the infrastructure yet. And I would rather, as we progress further down the road, even Foundry for instance, I don't want a lot of things in the model that either aren't included or aren't available.

Krista: Right.

Michael: Pick something that works for that price point and be about 10% better than any of your competition. Foundry is a little different because we don't have new-home competition, but maybe that buyer is otherwise looking in the northeast for $400,000 and saying, I don't necessarily love that area, but at least this is really close to work, close to the airport, close to whatever.

Krista: It's the freeway access. You can hop on and hop off. It's a great location.

Michael: Literally two stoplights. It's easy. So anyway, yes, we looked at our competition and what they were doing versus what we were doing, and I felt like we were better, probably three to 5% better, and I think we needed to be about 10% better, for largely the same price. And that's okay. We don't have the admin cost. We don't have shareholders to answer to. We're also microscopic in scale versus Toll Brothers when you look at their nationwide scope. This is ultimately a small business with a pretty small team, and if we can be competitive at all we should be grateful for that. The long and short of it is that we've under-specced in the last six to eight months. I don't think they're inferior, they're in line with their competition, but we can do better, we can blow our competition out of the water and probably still see the same margins because they'll carry a higher sales price.

Michael: That ties into other ideas I have for our SouthShore product, definitely a higher standard. I also wanted to run this past you. I've always had a hesitation when we talk about appliances, because people ask, and that type of buyer knows. So my thought is, even updating the standard features to say there's a $40,000 appliance package budget and you work with Margaret at Appliance by Design and you pick them out. Whether you want KitchenAid or GE, and it also gets you a double stackable washer and dryer, that's six grand, then you do it.

Michael: I do think we can do our current spec level in Westridge and Argos, levels 1-3 and 1-4, totally fine. But I think we might need to change it up a little on SouthShore, and maybe even on Serene because it's a similar demographic. I don't think it's as aspirational. A lot of those people are buying because of the square footage, or they want a new house, there are other reasons.

Krista: And if they have something specific they want, that's kind of the point. If our buyer comes to us early enough in the build process, they can still select that, and it just gets reflected in the total sales price. But that's not always the case. So if the home is completely finished and we've already made all those decisions without a buyer,

Michael: Right.

Krista: how much are we willing to bend?

Michael: To remove, or to give. And I also think when we're showing a lot of pre-sales, having that big number sounds so much more reassuring. Nothing's been picked, but the builder has a $40,000 allocation. You can go to Appliance by Design or honestly wherever, just give us the model numbers and spec this house out to your heart's content. You have $40,000 to spend. If you spend $47,000, you pay the $7,000. It's very simple. If you want a range imported from France, it's $17,000. If you're okay providing your own washer and dryer, that's fine. It's a pocket of money, a $40,000 allocation, so you can pick your Viking, your Thermador, your generator, your Sub-Zero. And if they have a buyer's agent, the agent should be able to say, oh yeah, $40,000 is a very healthy budget.

Krista: From a marketing perspective, what if there's just a little plate on the wall that says, credit for this of your choice?

Michael: Yes. This is the thing for me, appliances...

Krista: But then it doesn't feel finished.

Michael: I love new appliances. Sometimes the new-house feel is the appliances. It's something shiny, just from your lizard brain. It still has the energy guide on it, you can tell it's never been used. You don't have to visualize it, it's already there. So having them there, but still having the pocket, even though something is there, saying $25,000. I'm pretending like one of our homes is a model, like if we did that at Miramar, because it functions as a sales tool to say Trust Home Builders offers this appliance package, whatever it is.

Krista: Right. I think it matters more on the luxury product line. Those buyers have an idea of what they want, they've cooked on other ranges. Whereas at those more mid-level or lower price points, we'll still put a nice range in there, but the likelihood of somebody coming in and asking to upgrade the range

Michael: It does. Just the fact that it's 48 inches is enough for them.

Krista: at a price point right at the median sales price in the valley, that's just not something we'd typically accommodate. But you take it up to the two-million-dollar range and somebody walks in and they're not really thrilled with a Gen Air because, like you said, they currently have Sub-Zero or Thermador or Viking.

Michael: Yeah. I agree. Right.

Krista: So at what point do we have to decide, well, you're buying a Thermador range, so if you want something different, you'll close on this one and then swap it? I don't know, that's a good question. We want to give them the house they want, exactly like they want, but we don't want that range back either. I guess we could put it in the next house, but then they have to wait.

Michael: It's playing whack-a-mole. I think it only works if they're not specced. I can't be swapping appliances. I feel like appliances matter more than I realized. We fixed the windows, we fixed the stucco, we fixed the drywall, we fixed the tray ceiling, all those other things we've started to add. We fixed all those things, and appliances are the last thing I haven't addressed. I'm still going to spend $10,000 on appliances, so let's spend $40,000 really. I'll never under-spec appliances on anything over $1.5 million ever again.

Krista: It's one of those, you don't know it until you know it, but now that you know it, you'll never do it again. It cost you money. You've said that before, it's your pain point.

Michael: That's true. You never forget a mistake that cost you money or caused you pain. So it is painful. Anyway, I just wanted to brainstorm on that. Maybe that's pulling back the curtain too much, but when we talk about what drives cost: interior doors, windows, drywall texture, stucco texture, cabinet quality, and appliances. Those really drive the costs, but they also really make a difference. We still did the soft-close stairs, it cost me $17,000 instead of $10,000. So I didn't under-spec them completely, they're not bare bones. But there are things that are, number one, really hard to change after the fact, and number two, high touch points. Cabinets are high touch points. Drywall texture is everywhere. Doors you touch every day. We're doing solid-core doors at Serene, except on lot 5, only because the lead time is so much longer. But it does drive cost. The premium version of whatever you're talking about is three times the cost of the entry. It's not as simple as a five-inch baseboard versus a seven-inch baseboard. A door package for five versus a door package for two is like triple, a huge price difference, total, not just the product but the install. Some are really hard to work with. So, just things like that.

Krista: Yeah, that's been great. It's a good conversation, and it's interesting to pull back the curtain on a topic you wouldn't really think of, the risk of under-speccing. That's not something you'd typically imagine, but there definitely is a risk, and like you said, there's a pain point associated with it. So it's good info and good intel, and it continues to drive what we do and how we pivot within the market

Michael: It does. Right.

Krista: and what the market is dictating. And so much of what we build is passion-driven. While we try to market and stay fluent with it, there are certain things we don't give up because of your standards and the quality of what we're building. So thank you for your time. Thank you guys for being here, we appreciate it. Hopefully you learned a little something and some interesting tidbits. We'll see you next time

Michael: It is. Exactly.

Krista: See you on the next episode of Trust the Process Podcast. Thanks for being here. Bye bye.