Demolish a rental property & build new SFH on lot to sell

11 Replies

I currently own a single family home in Dallas, TX.  It is located in a popular area near downtown Dallas.  We have owned it for 11 years, and it is currently being rented by the same tenant for the past 6 years.  When my husband and I moved out of the property, there were a handful of homes being scraped and HUGE homes being built on the land. Six years later, there are tons of huge homes in our small neighborhood and they sell quickly.  The homes being built are around 3,400 SF and are selling for about $206-$210 SF.  We used to get letters from investors and builders interested in the property all the time.  The home is old, built in 1940 with original plumbing and wiring.  The lot is 8,189 SF and the home is 1,008 SF.   The property does not generate any cash flow, but we have a good amount of equity in the house.

MY QUESTION:   Should we sell our home and use the cash to purchase other investment property?  Or should we demolish the home and construct a new home and sell it in hopes of a bigger return?  Or do nothing and keep renting it.  We are just afraid, that our small home will be surrounded by the larger sized homes in the coming years and we have lost our window of opportunity.  I was wondering if anyone who has done this in the past give me insight and advice on what to look for, ask, maybe number calculations that I should look at.  We are meeting with a couple of builders in the area in the coming weeks, to finalize more accurate numbers to make our final decision.  Also, more of an accurate timeline to see how long the process will take.  This is only my second post, so I am pretty sure I have left out needed information. 

@Marzella Zielke

That sounds like a great problem to have, congratulations on recognizing an opportunity.

You will likely get alot of good advice on the site from folks who are more experienced. Just a few thoughts from me:

- If you are in such a desirable neighborhood and you've owned the property for 11 years, why is it not cashflowing? Can you raise the rent? What is your mortgage rate? Can you reduce it with a refi?

- If you want to sell it, another option is a pop-top. You will get the bigger house without doing a complete scrape and build.

Good luck!

-Dmitri

Marzella -

 I would be very interest in talking to you about this. Please contact me. We are building a house right now and are going through a similar question as what to do.

Hello everyone - thank you so much for the responses.  Dmitri, while living in the property we refinanced the house owner-occupied cash out.   A couple of years ago, while our tenant was living there we went to several banks to try to refinance the property, but we were told according to Texas law we could not do that as investors.   To answer your question on raising the rent, we have had the same tenant for six years, she is great and did not want to lose her.  We have raised the rent on her twice already.  Six years ago when we first put the property up for rent, there were 3 other homes in the area we were competing with, so ended up lowering our rental price to be competitive.  At the end of the day though, the taxes are killing us.  We fight property taxes every year on this property.  What started out as a positive cash flow property, has turned into no cash flow years later.  Calling around the neighborhood at other rentals in the area, we are a little below average on rent, so there is room to raise the rent.  The currents tenant lease is up March 2016, so we are trying to be proactive and figure out what are options are.  I know that if we sell the house, it will most likely be sold to an investor or builder.  If the property is going to be torn down and built on and sold, why not us?  I have not heard the term "pop-top", so I am going to look it up and start reading up  on it. 

Nicolas - would love to bounce ideas around, will be in contact soon.

Cal C - thank you so much for your advice.  I am currently reading his book on Flipping Houses (LOVE IT), and will download the book you mentioned. 

Again, thank you again for everyone's time and response.  I really love this website!

You might research which builders are doing those new homes in that neighborhood and see if any would be interested in doing a joint venture with you. This might not get you as much potential return as doing a spec build on your own, but it  would be far safer since you don't have the experience and expertise.

I would first talk with some real estate brokers and get an idea of what the property would sell for in its current state. An outright sale might be the simplest and most cost effective solution; you could do a 1031 exchange into a more profitable rental property perhaps?

@Marzella Zielke

A "pop top" is just adding an additional level to an existing home.  With a 1940 build and all original infrastructure, that doesn't even make sense, particularly when it's no less expensive than new construction and is sometimes more.

Your lot is where your value is right now.  I don't know what you owe on the property, but let's just make up some numbers and do some easy math for an example:

Current Value:    $300,000

Owed:                $150,000

So, you could sell for mostly land value and pocket $150k.  You won't have any short-term gains, because you've held the property for 11-years.  You can then turn around and use that $150k for other investments.  Or...

Cost to Scape & Build:      $500,000  (3,400 sq ft)

Sales Price:                        $750,000

Gross Profit:                       $250,000

Then subtract out the holding costs (payments on the bridge loan, while construction is underway), the opportunity loss (you will have significant financial flexibility tied up, plus the Time Value of Money equation), now figure out what your risk contingency is and subtract that as well.  My guess is that the Net Profit on both is about the same. 

What are similar lots selling for in the area?

Is the money you have into the house/w demo costs the close to the value of the lots sold in the area? I wouldn't build on a lot that has more money into it then its worth IMO... If your equity in the home w/ associated demo costs translates to you holding buildable land that is of value, you may have a good deal to work with. If you are holding a buildable lot below market value, then you could have options.

At that point I would consult with builders who would possibly work w/ you. Your scenarios would be to see if they would partner if you bring the land to the table (and I am sure additional incentives) or have them quote a sq foot price to build a spec. The latter may bring more profit (depending if you secure a good build price w/a quality builder), but you would need to secure your own financing. Option one mitigates risk w/ a partner, while they also have an invested interest to build at a good price while maintaining quality. Option one is the scenario to go with if you have zero new con experience. Partner w/ someone who already has ties to new con financing.

Simply compute that info w/ comps you have and see if the profit is there.

If you are being taxed out in a no-cash flow property your safest (and least profitable) route would be to sell out to a developer. But what's the experience in that, Ha!

Good luck!

Jean Bolger - I've been driving around the neighborhood, plus the one next to it and I am meeting with two different builders within the next two weeks. Meeting with a real estate broker is also on my one thing list to see what we could potentially sell the property for. My husband and I have been watching the neighborhood activity for a while, so we came up with a potential sale price, but would like to get that number confirmed with a pro. I know the simpler way would be to sell the house, but would love the added experience of going with a build. We may be in over our head, so after we meet with some builders hopefully we'll have a better perspective on everything. I will look at a 1031 exchange, I have heard the term but will need to do some research. Thank you so much for your response.

@Marzella Zielke

If this is in the area I suspect it is, you will probably find your only option long-tem is scrape and build.  The land values in these neighborhoods (like one that is just northeast of Love Field Airport) are rising so fast that rents will not keep up with property taxes.  The lots in these areas are often worth 5 times the value of the structures.  That sometimes means the lot is valuable enough to be able to work a construction loan so you could do the scrape and build yourself.  Otherwise, find out who is building in the area and see who wants to buy you out.

Good luck and good hunting!

I'll chime in with my personal experience with this in Nashville.

About 20 months ago my wife and I did a "pop-top" on our personal residence and are thrilled with the result.  We had an early 20th century bungalow whose downstairs was "updated original" and the upstairs was essentially just a large loft. Our family was expanding to three kids and we needed more room, so we literally took the top half of our house off and rebuilt it into what looks like an American Foursquare. We had a 2000 sq ft footprint and rebuilt 2000 sq ft on top of that for a total of 4000 sq ft.  We ended up getting two bedrooms for the kids with walk in closets, a nice bathroom with double sinks and tiled shower/bath for the kids, an 88 sq ft laundry room, a 160 sq ft office with build-in shelves, a family/media room, and a large master suite (500-600 sq ft) including custom closet built-ins, double sinks, double shower heads.  Including demo and reconstruction it cost us $140-145K (~$75/sq ft).  We could have actually had the price in the mid-$130s if we hadn't splurged a little on the floors with "heart pine" upstairs to match the original floors downstairs or gone with typical insulation instead of the expanding foam insulation. We didn't have to touch the downstairs, and we didn't have to build a kitchen which is pricey.

I am also currently working on a teardown and rebuild here with the same builder I used for my personal residence (we also do flips together).  We have a partnership that enables me to get "wholesale pricing" of construction on the front end and then we split profits on the back end.  With the "wholesale pricing" we're looking at total costs of around $300,000 for a ~4000 sq foot house, exclusive of landscaping and acquisition costs.  We'll then split the profits at the end.  A general contractor will charge additional money for themselves, so that number would likely be a lot closer to $400,000 if I were to do this without the partnership (although I am paying for that service, just after sale goes through).