The Tear Down Option: Is it for You?

Want to build a new home in an established neighborhood? Tear downs and infill homes may be a viable option for you.

An option many home shoppers overlook is building a brand-new home in an existing neighborhood that offers key features they want: Good schools, a short commute to work, a well-developed sense of community, and close proximity to cultural and entertainment options.

How’s this possible when close-in neighborhoods tend to be fully built up, with no empty lots? You can find the answer across the country in places like the suburbs of Washington D.C., Chicago, New York, Boston, Austin, Los Angeles and Seattle.

By tearing down older, functionally obsolete houses whose main value is in the land they’re built on, builders can create up-to-date homes that are either built for specific purchasers or sold on speculation in the regular real estate marketplace.

Though the term “tear down” was associated with outsized McMansions during the housing boom years, today most buyers and builders replace the houses they demolish with new homes more in sync with the surrounding neighborhood. Tear downs are also welcomed by some local governments as property tax revenue enhancers since they produce replacement houses that cost much more than the demolished home.

But tear downs can be complicated — involving permitting, zoning, historic preservation, and demolition challenges that buyers of homes in newly developed subdivisions never encounter. Here’s a quick guide to help you answer the core question — could a tear down and custom-built replacement be a smart move for me?

How do I recognize a house as a tear down candidate?

Potential tear downs almost always are houses that aren’t quite up to current standards in sought-after, attractive neighborhoods. They may be smaller-than-average in square footage, have outdated kitchens, lack sufficient bathrooms and are energy guzzlers.

They may have serious structural issues, making them difficult to sell because of the cost of repairs. As such, they tend to be priced below the prevailing average for their street or neighborhood and often sit unsold longer than others, unless their sellers are actively marketing them as prospective tear downs.

According to Chicago-area tear down real estate specialist Brian Hickey, who heads InfillRE, LLC and Teardown.com, a tear down should be able to support a new house that, when complete, is valued at two to three times the price of the tear down house at acquisition. Put another way, if you can buy an older, functionally obsolete but well-located house for $300,000 and a newly constructed house on the same lot will support a price of $600,000 to $900,000, it may be a suitable candidate.

Do I have to knock down the entire house?

Absolutely not. In fact, in some communities, local government rules encourage substantial renovations over demolitions by making the permitting easier and faster. You might, for instance, be able to retain the existing foundation or add to it. You might be able to retain a portion of an existing wall or incorporate part of the old structure into your new design, and thereby sidestep local restrictions on total demolitions.

In historic districts where tear downs are banned, you might also be able to qualify for tax credits by undertaking substantial rehabilitation.

If I have a choice between renovation and tear down, how do I decide?

Usually the key factors are the current condition of the house and what you want out of a new house.

Older homes can have severe problems that make them financially unfeasible to repair, such as heavy infestations of mold or pests, extensive water damage undermining the foundation or footings or roof damage from wind or rot. They often have interior layouts difficult to rearrange for modern uses and outmoded components that all need to be replaced — at significant cost — whether you tear the house down or try to renovate it.

Ask yourself: Do I want a home that is energy efficient, from windows to doors to kitchen appliances? Wired for all the sophisticated electronics we use today? With room layouts that make sense for the style of living you want for you and your family? If you can’t get what you want at a reasonable cost by renovating, then demolition and new construction may be your inevitable answer.

How do I locate professionals to help me identify and acquire a tear down property?

Once you’ve decided on the neighborhood where you want to buy, you can contact several real estate brokerages that are most active in the area. Ask who among the firm’s agents either specializes in or has experience in tear downs or substantial renovations.

To locate potential builders for your project, you can search NewHomeSource.com, which offers the largest collection of builders, new home plans, and communities on the web. You can also contact your local chapter of the National Association of Home Builders for advice or ask your mortgage lender, real estate agent or architect for suggestions, including referrals to design/build firms.

Are there local restrictions that might limit my ability to demolish a house and build a new one on the same site?

You can count on it! Many older, desirable close-in communities have land-use rules and codes intended to protect the existing character of the town or neighborhood. Others have historic preservation districts banning most tear downs or requiring replacement structures to strictly adhere to the predominant architectural size and standards of the neighborhood.

How much does it cost to tear down a house?

Financing is definitely more complicated when you do a tear down. First you’ve got the cost of the existing house. Then the demolition expenses. And finally, you need long-term mortgage financing.

Unless you are wealthy and have buckets of cash sitting around, you’re going to need money for the purchase of the tear down. You might, for example, use the proceeds of the sale of your previous house and make the purchase of the tear down property contingent upon that sale. (The sellers of the tear down won’t like it, but they may agree to it.)

Demolition costs vary with the size and location of the tear down property, but generally range anywhere from $8,000 to $15,000. You may be able to recoup most of the demolition expenses by recycling the contents and structural elements of the tear down itself, whether through sale or by tax-deductible donations.

The local professionals you engage to assist you — the real estate agent and the design-build firm — should be able to guide you on financing. Your local community bank may be the source of what you ultimately need — a so-called “construction-to-permanent” loan that provides you funds for the building phase and converts to a long-term mortgage once construction is complete.

Interest rates and other terms can vary widely — these are loan types that banks retain in their own portfolios and consider higher risk than ordinary mortgages, so shopping is essential. If you’re lucky, you will run into a local bank that will do a complete package deal — a single loan transaction, based on the estimated value of the new home after the tear down and construction, with periodic draws to finance the building phase, followed by an automatic permanent long-term mortgage.

What sort of local permits will I need?

Most municipalities have rules requiring you — or more likely your builder — to obtain a demolition permit before doing anything.

You also need to contact utilities companies — gas, electric, water — to determine when and how you can disconnect the house you intend to knock down. You should also check with the fire department to determine what sort of inspections or oversight is required prior to demolition. Local government rules may also require inspections for toxic materials inside the house, which is particularly important if the structure dates to the 1960s and earlier, when asbestos was commonly used in ceilings, duct work and flooring.

The bottom line is a tear down can be a viable option for you, but be aware of the potential traps, snares and costs up front.