How to Find Investors for Spec Homes (and Structure the Deal)
If you want to know how to find investors for spec homes, start with the people who already know and trust you, and show up with a specific deal instead of a general idea. Most small builders raise their first outside money from past clients, friends and family, local business owners, and professionals in their network, using a one-page pro forma and a track record. Then they structure the deal in writing, with an attorney, because raising money from investors is regulated by securities laws.
Other people’s money lets you build more houses than your own cash allows. It also means that when a project goes badly, you’re losing a friend’s money along with your own. Take that seriously before you take the check.
Who are spec home investors, and where do you find them?
Spec home investors are usually individuals with capital who want real estate returns without doing the work. For a small builder, they tend to come from a short list:
Past clients. They’ve watched you build. They know how you handle money and problems.
Friends, family, and people in your community. The most common starting point, and the one with the highest personal stakes.
Local business owners and professionals. Doctors, attorneys, business owners, and others with investable cash and little time.
Referrals from your CPA, attorney, or banker. They know who invests in local real estate. They may not hand you names, but they’ll sometimes make an introduction.
One caution. Whether you’re allowed to advertise an investment publicly, and who you’re allowed to accept money from, depends on securities rules. Ask your attorney before you post anything online or pitch a room full of strangers.
What do investors want to see before they put money in a spec home?
They want to see that you’ve done this before, that the numbers make sense, and that you’ve thought about what could go wrong. Bring a simple package:
Your track record. Homes built and sold, with honest results. If you’re new to specs, show your custom building history.
The specific deal. The lot, the plan, the neighborhood, and why this house there.
A pro forma. Projected sale price, land, hard costs, soft costs, financing, selling costs, profit, and returns. Our Spec Home Pro Forma Template is made to share with investors and banks.
Comparable sales. Recent sold homes supporting your price.
The timeline. When money goes in, how long it’s tied up, and when it comes back.
The downside case. What happens at a lower price or a longer sale.
Your own stake. How much of your money is in the deal and what you’re guaranteeing.
If you need help with the numbers, I walked through them in how to build a spec home pro forma.
How do you raise money to build houses without getting in trouble?
You get a securities attorney involved before you accept a dollar. When you take money from someone who expects a profit from your efforts, you’re very likely offering a security, and federal and state securities laws apply. That’s true even if it’s one house, one investor, and the investor is your brother-in-law.
I’m a builder, not an attorney, so here’s the general shape of it and nothing more:
There are rules about who can invest and how much you have to disclose to them.
There are rules about how you can find investors, including limits on public advertising for many types of offerings.
There are filing requirements in many cases, at the federal level, the state level, or both.
Misstatements and omissions carry real liability. Optimistic projections presented as promises are a classic way to get sued.
The specifics depend on your state and how the deal is set up. An attorney who does this work can usually set you up with documents you can reuse on later projects.
What are the common ways of structuring a spec home deal?
Structuring a spec home deal comes down to whether the investor is lending you money or owning part of the project. The common structures, described generally:
Private loan. The investor lends money at an agreed interest rate, usually secured by a lien on the property. They get paid first and get a fixed return. You keep the upside and the risk.
Equity partnership. The investor contributes cash to an entity that owns the project, commonly an LLC, and receives a share of the profit. No profit, no return.
Preferred return plus a split. The investor gets a stated return on their money first, and then remaining profit is divided between investor and builder.
Whichever you use, the agreement should answer these questions in writing:
Who puts in what, and when?
Does the builder charge the project a fee for construction and overhead, and how much?
Who decides on budget changes, pricing, and accepting an offer?
What happens with cost overruns? Who funds them, and does it change the split?
What happens if it doesn’t sell? Price reduction, rental, or buyout?
How and when is money distributed at closing?
I’ve written about getting the split right so both sides feel well treated in Value Buckets for Better Deal Structuring.
How do you pitch a spec home deal to an investor?
Keep it short, specific, and conservative.
Lead with the deal, on one page. Lot, house, cost, price, timeline, projected return.
Show your assumptions. Especially the sale price and where it came from.
Present the risks yourself. If you bring them up first, you look like someone who has thought it through.
Never guarantee a return. Projections are projections. Say so, out loud and in writing.
How do you keep investors for the next project?
Report more than they expect and deliver what you said. Repeat investors are far easier to work with than new ones, and they’re your best source of referrals.
Send regular updates. Monthly is a good rhythm: photos, schedule, budget versus actual, and any issues.
Deliver bad news early. With a plan attached.
Keep the project’s money separate. Its own bank account and clean books.
Close out properly. A final accounting that ties back to the original pro forma, plus the tax documents their CPA will need.
Investor equity is only one piece of the capital stack. For how it fits alongside bank debt, see spec home financing.
Frequently asked questions
How do spec home investors get paid?
Either as interest on a loan or as a share of the profit when the house sells, depending on the structure. The agreement should spell out the order in which everyone is paid at closing.
What return do spec home investors expect?
It varies with the market, the structure, and the risk. Lenders in a secured position usually accept a lower, fixed return, while equity investors expect a higher potential return for taking more risk.
Do I need an LLC to raise money for a spec home?
Many builders use a separate LLC for each project or group of projects, but the right structure depends on your situation. Ask your attorney and CPA.
Can I raise money to build houses from friends and family?
Many builders do, but securities laws can still apply. Put the terms in writing and have an attorney set it up correctly.
BTW, if you want a clean one-page deal summary to put in front of an investor, grab our Spec Home Pro Forma Template over at the Building Optimal Shop, where you can check out the rest of our swag to build a better business. Proceeds go to benefit, Exponencialistas, my non-profit investing in entrepreneurs transforming their communities in Latin America.