What are the different types of home builders?
Are you a new investor in the home building industry who is unsure how to define different types of builders? If so, this is the resource for you!
Recently I was reading a real estate training guide that stated there are two types of home builders - tract and custom. Another source says there are three types of builders - tract, spec and custom. Honestly, in my opinion these are gross generalizations by people who really don't understand home building. I work with home builders every day who focus on all types of different residential products. Developers, tract builders, custom home builders, spec home builders and more. I thought I would define a variety of different home builder specializations for those who may be interested in learning. So, here is a short, non comprehensive list of how I define different types of home builders based on over 15 years of experience building homes in many different markets across the United States.
Disagree with my definitions or feel that more should be added? Leave comments below!
Types of Home Builders Defined
Spec Home Builder - a home builder who builds a home while speculating that it will eventually sell for a profit. A spec home builder can be any type or size of home builder including large publicly traded home builders. This builder owns the land on which the home will be built. They will choose the architectural plans, exterior elevation, as well as the features and specifications of the home all in an effort to build what they believe will be best suitable and most profitable on the site given the local market and target buyer. Spec home builders may make a home available for sale at any time during the construction phase including very early or in some cases even after the home's construction is complete. Buying a spec home generally does not afford the buyer any opportunities to upgrade or customize their home unless they purchase the home early in the construction phase and the builder is willing to allow modifications.
Pre-Sale Home Builder - a home builder who, similar to a spec home builder, owns the land on which the home will be built. Pre-sale home builders also generally own or have rights to use one or more architectural plans (models) suitable to be built on the home site. These builders often have a model home or showroom where they can showcase their architectural designs and features to prospective home buyers. The goal of a pre-sale home builder is to entice a prospective home buyer to sign a Purchase and Sale Agreement (a.k.a., "PSA") thereby agreeing to have the builder construct a specific home plan on a particular piece of property - all before construction begins. Some pre-sale builders allow buyers to select colors and certain features or upgrades. Upgrades can be structural or cosmetic in nature. Color selections, feature selections and upgrades offer the pre-sale home buyer the ability to add customization to the home they are buying. The downside of a pre-sold home is that the buyer must wait several months before they can move into their new home.
Custom Home Builder - a home builder who agrees to build a home for a specific customer using the customer's unique architectural plans, and on land owned by the customer. Custom home builders are beholden to the customer's unique tastes but must often contend with challenges associated with what a homeowner wants vs. what the homeowner can actually afford. Custom home building can be very challenging and time consuming for the home builder who must often deal with a variety of change requests initiated by the home owner throughout the planning, design and construction processes. These builders may be engaged in lengthy (sometimes exceeding 1 year) projects and extended relationships with the homeowners. As a result, custom home builders often structure their businesses very differently from other home builders with focus on customer service and homeowner experience. They may even incorporate in-house architects and interior design staff to offer a more comprehensive design/build experience. Custom home building, while challenging for the builder in some ways, is enticing as a business model because of the reduced financial risks and potential for increased profits.
Scattered Site Builder - a home builder who acquires (purchases) and builds homes on individual scattered or infill lots located in varying geographic locations. Scattered site builders can build spec homes or pre-sold homes.
On-Your-Lot Builder - a home builder who is willing to build homes on land owned by the customer. Often these builders have a portfolio of architectural plans (models) available for sale. These builders are generally not considered custom home builders because they offer to build models from their existing portfolio at a fixed price with limited or no customization options available.
Community Builder, a.k.a., "Tract Builder" - a home builder who builds homes within a community at a production style pace. In its truest form the definition of a Tract Builder is one who builds the same house over and over within a community resulting in very little architectural diversity. However, most modern community builders will offer 5, 10 or even more home plans within a community. Often each home plan will be available for sale with multiple exterior elevations (changes in roof pitch, windows, siding or other features to make the home unique). The result is that a buyer can often choose their lot, the model of their home and the exterior elevation providing a sense of customization for the customer while providing architectural diversity within the neighborhood. These are often large well capitalized publicly traded home builders or regional home builders, but not always. Community builders may set up a community Homeowner's Association (HOA) to govern future homeowners within the community in an attempt to maintain appearance and home values.
Developer - a developer is a construction contractor or engineering firm focused on land development, also referred to as "Horizontal" construction (as opposed to "Vertical" construction, which is building the actual homes). Developers may take on one or many stages of the land development process including land entitlements, planning and design, infrastructure construction, earthwork, road/sidewalk installation, and even building community centers and other elements within a community. Some developers may acquire land and sell it once it is entitled - a process that can often take several years. Other developers purchase entitled land, complete the community planning and design, which they then get approved through the local municipality before performing the actual horizontal construction work on the community or plat. Often these developers will then sell the fully developed community or plat to a community home builder. In some cases the developer will maintain ownership of the community or plat and build homes themselves making them a Developer-Builder.
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