Should You Tear the Darn Thing Down?

Sometimes it pays to raze your home and build a new one

Although their first child is due in just a few weeks, Neil and Rebecca Cadman of El Segundo, Calif., aren't putting a lot of work into sprucing up their 80-year-old bungalow. Come September, they're going to move out and "scrape it to the dirt," says Neil Cadman, a property manager. For close to a year, they'll be living nearby, maybe with Neil's dad. On the 50-foot by 200-foot site of their 1,100-square-foot, three-bedroom house, they're going to build their dream abode--a 4,000-square-foot, Mediterranean-style villa with five bedrooms and "probably" six bathrooms.

Even if you're not going to make like the Cadmans and bash your house to bits, the nationwide teardown phenomenon is something you need to know about. Before sinking a lot of money into renovating an older house, you should investigate whether it would be more sensible to buy elsewhere and sell your property to a builder who will tear it down and rebuild. And if you're interested in a house that's cheap for its neighborhood, it's good to know if builders who envision knocking it down have expressed interest, too.

Teardowns represent the triumph of size over sentiment. While there will always be a market for cute little fixer-uppers, most buyers today want big houses with big, modern kitchens and bathrooms. According to the National Association of Home Builders, the average newly built home has 2,305 square feet of floor space, up 53% from 1,500 square feet in 1970--even though the size of the average family has shrunk 15% or so over the period. Teardowns are most common in desirable older neighborhoods where the real estate market is tight and demand for big, modern houses exceeds supply. While some towns, such as Naperville, Ill., and Birmingham, Mich., have resisted the onslaught of "bigfoot" McMansions that spoil the character of neighborhoods, others welcome the rejuvenation of their housing stock and additions to local property-tax rolls.

Whether you're selling, buying, or renovating, the key is to know when a house is a good candidate to tear down. Don't go just by price: In some super-hot markets, even $1 million houses are being razed. A house has "teardown" written all over it if it's small for the neighborhood, in bad shape, has an old-fashioned layout with a small kitchen and too few bathrooms, or is on a lot with room for a grander house.

A house is most likely a goner if the property it's on is worth far more than the structure. Builders see big yards as wasteful, since many buyers are happy with econobox starter mansions on postage-stamp lawns. Likewise, large, handsome trees can be the enemy of the house they shade: They raise the lot's value and increase the chance someone will want to build a mightier house on it. On the other hand, houses are less likely to be torn down if they're soundly built, modern features can be added for a modest cost, or they have historic character in an area that prizes authenticity.

TO-DO LIST. Think twice before tearing down your own house or buying a house with the intention of tearing it down. It's a lot riskier than buying an existing house, where you know exactly what you're getting and how much it will cost. Most teardowns are done by professional builders on speculation, and even pros can run into unforeseen problems with permits, construction, or a soft real estate market.

If you still want to do a teardown, go house-hunting first to see if you can find what you want on the market, and how much it would cost. That sets the upper limit for how much you should spend on a teardown project, says Martin Stone, managing broker of Buckingham Investments in El Segundo and co-author, with colleague Spencer Strauss, of The Unofficial Guide to Real Estate Investing (Hungry Minds, $15.95).

Have a reputable builder or architect assess the house you're living in--or looking at--to tell you whether it's smarter to renovate, start from scratch, or walk away. The fee for a thorough consultation could be as high as $3,000 or $4,000, but it's well worth it, says Douglas Andrus, broker-owner of Prudential Grosse Pointe Real Estate Co. in Michigan.

Make sure local zoning ordinances will let you build the house you want. Keep in mind that zoning laws may not allow you to expand as much as you'd like. In some cases, even the current footprint of your house may be too big for new construction under zoning laws passed after it was built. Also, remember that if you build a house, you'll probably need a construction loan--a credit line that gets converted into an ordinary mortgage when the house is finished.

It's a daunting list of to-dos. But it didn't scare off the Cadmans, who are partners in an El Segundo property-management firm called Cadman Group. Financially, the decision to tear down and rebuild wasn't an obvious call. They bought their house four years ago for $268,000 and recently received an unsolicited offer of $450,000 for it. That's money they could have used toward buying an existing house. But they didn't want to leave the neighborhood. Plus, they think they'll still come out ahead if they can stick to their budget of $400,000 to tear down the existing house and build the new one, which they think will have a market value of close to $900,000. They're saving money by acting as their own general contractor, using subcontractors who work for Cadman Group. And they didn't have to pay an architect. A relative who's a structural engineer did the building plans.

If you see a wave of teardowns in your area, enjoy the ride, because it may not last. In such neighborhoods, builders often do the teardowns and put up new houses on spec. To make money, they have to build houses that are more expensive than others in the area. As long as those new houses keep selling, they pull up prices of existing properties. But when the market says enough already, builders pull out, and the merry-go-round stops, says Ken Lampton, a broker at RE/MAX Premier Realty in Dallas.

For now, that's not a problem. Sales of new and existing homes are running at a record pace this year despite slowing economic growth. The demand for choice parcels of land is unabated. So before you invest another dime in your beloved old house, it behooves you to think hard about whether you'd be better off moving out--and handing the keys to some guy with a bulldozer.

By Peter Coy

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