Question

1) Speculation can always be risky because if it turns out the number of houses you built through speculation is not sustainable, you will lose money and may not be able to deliver payments. It points out you have to factor in depreciation, that is something that seems hard to predict with full accuracy. One item that I did not understand so well, that I need elaboration is the difference between owner drove and speculation driven. Is the difference in speculative just that it is sold once it is 100% percent complete?

Answer 1

Difference between owner drive and speculation driven is that in case of owner driven we start construction of houses only after receiving the orders of construction of houses from customer whereas in case of speculation driven construction of houses starts even before any demand is received from the customer . Construction of houses are started by making speculations of demand using various tools and techniques like how much sale took place in previous year, stage of economy, growth rate of economy, rise in inflation, interest rates, growth in the income level of people. All these factors are very important and are considered before starting construction of houses for customer else company may have to face losses firstly in case of oversupply due to locked working capital in terms of unsold inventory and in case of undersupply in terms of lost revenue.