Why Teardowns Rise In Metro Areas

Does it seem like the old neighborhood ain’t what it used to be — especially if the old neighborhood has good-sized lots, smaller homes and rising values? What you may be looking at is an ideal “teardown” area, a community where both demolitions and housing prices are booming.

While new homes are bigger, lots are not. As the price of ground has shot up in major metro areas, what we increasingly see are big houses on small lots further and further away from big city cores.

This means that in many communities we also have older and smaller homes on large lots with close-in locations — so-called “infill” properties. These infill properties raise a question: Is there a way to increase their value and utility, and is it worth trying?

  • Do nothing. If smaller and older homes worked for families 50 years ago, why change? Such homes are, or can be, perfectly habitable — especially for small households.
  • Renovate. With this option we take the basic house and fix it up with new kitchens, baths, electrical work and other improvements. This is a good choice for folks who like their current home and have no interest in moving or enlarging.
  • Expand. In this case we take the basic house and add-on. This needs to be done with care. For example, additional cubic footage will require a larger heating and air conditioning system. Also, some expansions are impractical. A five-bedroom home with a tiny kitchen may not “work” on a daily basis.
  • Tear it down. With a “teardown” you remove the current home and replace it with entirely new construction. The result is a big, buildable lot with mature trees, a close-in location and — in a short time — a modern and larger home.

The attraction of a teardown as opposed to a renovation or expansion often involves money. On a cost-per-square foot basis a teardown can represent a good value, especially when the result is a completely new home with modern design and new features. Older homes, for the most part, lack common features found in new construction such as great rooms, walk-in closets, spa-like baths, and big kitchens. Newer homes often have small lots, few trees and distant locations. With a teardown you can get the best of both options.

To make a teardown work you need a purchase price which is significantly below the teardown re-sale value. For instance, if you have a 1950s rambler with 1,200 square feet situated on a 1-acre lot that can be bought for $250,000 you might then ask: What would this property bring with a new home? If the re-sale value is $750,000 or so after improvements, a teardown could make sense.

A teardown project is not a job for someone looking to buy without cash or credit. In our example, the buyer paid $250,000 up front and then had the expenses required to take down the old home, carry a mortgage, pay property taxes and build a new home. Such costs must be paid with cash or investor financing. If the final sale price yields a 10- to 20-percent profit, the investor made from $75,000 to $150,000, most probably over a period of 15 to 18 months.

Marketing a teardown differs significantly from a typical home sale. With a teardown there is nothing to fix-up, no open houses, no home inspections or worries about condition. Teardown buyers really don’t care about old carpeting or marred walls — it’s all going to go anyway.

Teardowns often resolve another problem. Investors tend to think of older homes as good properties to demolish and replace with townhouses or several residences — options often opposed by neighbors and local governments. With a teardown, one house is replaced by another, a zoning-friendly strategy.

In one nearby neighborhood we have had a number of teardown projects. Small, brick single-story ranch houses and wooden cape cods on large lots have been replaced with palatial houses, some seemingly with enough interior space to stow a blimp. In other cases, older homes have been enlarged and are now part of what might be described as compounds.

Because the teardown area is heavily wooded the new construction largely fits with the older houses that still dominate the neighborhood. But those older homes, fixed up or not, are now far-more marketable than in the past. With few buildable parcels remaining in the area, prices for small homes on large lots are soaring — great news for long-time owners and their neighbors.

Published originally by Realty Times on January 20, 2004 and posted with permission.

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