Spec vs Build-to-Order: Which Model Will Define Toll Brothers' Future?

Toll Brothers, Inc. TOL continues to refine its operating strategy as the housing market navigates affordability challenges, shifting buyer preferences, and fluctuating mortgage rates. At the center of its approach lies a strategic balance between speculative (spec) construction and build-to-order homes—a mix that could define the builder’s trajectory in the coming years.

Historically, Toll Brothers operated with just 10–15% of homes built on spec. Today, that figure has surged to roughly 50%. The shift reflects evolving consumer demand, particularly among affluent millennials and move-up buyers who prioritize speed and convenience over lengthy design cycles. Toll Brothers’ spec homes are not simple stock models; many are curated with design packages that allow personalization, blending efficiency with the premium experience that underpins its luxury brand.

This pivot brings tangible advantages. Spec homes reduce construction cycle times, improve capital efficiency, and allow Toll Brothers to react nimbly to market demand. In the third quarter of fiscal 2025, the company had 3,200 specs in process and 1,800 permits ready, giving it flexibility as rates ease and demand revives. Meanwhile, build-to-order homes—often tied to premium lots and significant upgrades—remain vital for driving margins, with some topping 30%.

The balance may never return to the “old days” of 90% build-to-order. Instead, a 40–60% spec mix seems more sustainable, offering resilience in uncertain markets. With luxury ASPs above $1 million and a backlog priced at $1.16 million, Toll Brothers is positioned to leverage both models to preserve profitability and capture demand.

TOL’s Competitors in the Spec vs Build-to-Order Debate

Two major homebuilding peers—Lennar Corporation LEN and D.R. Horton, Inc. DHI—offer useful contrasts to Toll Brothers in the evolving balance between spec and build-to-order models.

Lennar, one of the largest U.S. builders, has long leaned heavily on a spec-driven approach. Its focus on quick delivery and standardized product lines makes Lennar highly efficient in capturing volume demand, particularly in entry-level and move-up segments. 

By contrast, D.R. Horton, the nation’s largest builder by volume, also emphasizes spec production to maintain scale but has diversified with higher-end offerings in certain markets. D.R. Horton has demonstrated that scale-driven spec building can still coexist with premium positioning. Compared to these peers, Toll Brothers targets the luxury niche, where its curated spec homes complement traditional build-to-order offerings. The contrast underscores how Lennar, D.R. Horton, and Toll Brothers are each shaping their future models around different market segments.

TOL’s Price Performance, Valuation and Estimates

Toll Brothers’ shares have gained 29.6% in the past three months, outperforming the Zacks Building Products - Home Builders industry, broader Zacks Construction sector and S&P 500, as shown below.

TOL Price Performance

In terms of its forward 12-month price-to-earnings ratio, TOL stock is trading at 9.95, down from the industry’s 12.44.

P/E (F12M)

Over the past 30 days, the Zacks Consensus Estimate for TOL’s 2025 earnings per share has declined to $13.86 from $13.95. The estimated figure indicates a 7.7% decline from the year-ago profit level. Again, the consensus estimate for fiscal 2025 revenues implies 0.2% growth.
 

Toll Brothers currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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