When does it make sense to level a house and build new?

Land & New Construction
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When does it make sense to level a house and build new?

Donald Capwell
Rental Property Investor · Mesa, AZ · Member since 2015 · 149 posts · 52 votes

Howdy, all!  I searched for an answer to this, but didn't find it... Please just give me a link if there's already a discussion about this that I missed!  This question is for anyone that is currently doing this sort of deal, or regularly considers this and has done this sort of deal... 

BACKGROUND - 

I worked for a man that once helped build a homeless shelter some years back (10-ish).  During the process, he questioned whether someone could build a new home (3/2), and make it available to people that are in need for around $50K ("affordable" was his goal).  So, to settle the matter, he actually set out to do it.  He bought some land and then built 3 identical houses, side by side, fully stocked with all appliances, weed wackers, rakes, brooms and lawn mowers, "turn key" homes, and then sold them for $50K each.  Net profit per house was $150.00.  In the end, he was satisfied that his logic was sound - it could be done (this is "yesterdays" money, and not to imply it could be done in today's economy) - but he also realized that you certainly can't make a business case to do this!  

With this story in mind, what is the business case YOU use to pull the trigger on building a home verses walking away, with the assumption that a house is beyond rehab. (NOTE: I do NOT mean that you will make MORE money to build new versus rehab - assume a rehab is not an option, and you have to buy on the basis of discounted land value, area's desirability and comps, or you it's not a deal). I have a property that I'm evaluating, and the existing house needs to be torn down and a new house built. No, I will not be doing this work myself, but if it makes sense, I'd like to work with the investor that does this so I can learn. Houses going up in the area are upper mid-range to luxury finish. Without getting caught in the weeds, at what point and using which method to evaluate (ie: Net Profit, ROI, Cash on Cash return, etc) does it make sense for YOU to level a property and start over? Would you do it for $50K? Not less than $100K? 150K? More? What makes sense for you to pull the trigger, and what questions SHOULD I be asking that I'm not?

Next, as a sidebar to anyone that may be doing this in Norther Virginia, what is your cost to build per square foot for a upper-mid grade (new construction)? I've been quoted several rates locally, from as low as $95/sf and up to $135/sf for upper mid-range to luxury grade builds. Let's hear from you VA home builders!

Thanks for taking the time to answer.

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Judy Raymond
Fort Mc Coy, FL · Member since 2016 · 18 posts · 5 votes
10y

Be careful. You are buying a property with a building that you are going to have torn down than turn around and flip it to a builder for them to build or split the lot and build? If you tear the building down you are creating some issues that you may not have thought through. One is your lot right now has water, sewer, power etc. If you scrape you have now created new issues that you have to overcome with the building department and Public Works and the Utility provider. You are also potentially making it more difficult for someone to get financing on a vacant lot. If you plan to buy the property and hire a builder to come in and build it for you, you are losing all the profit. You may be splitting the profit but the builder is still going to be paid during construction of this project which bites into the profit. If you keep the existing building, possibly do the leg work to split the lot and market the empty to a builder/developer and the lot with the house to a rehabber or builder, you could probably make the same profit or more in half the time. New construction can eat a professional's lunch and rehab can destroy rock solid marriages. If you go into a project like this without much knowledge of construction or dealing with the govt entities involved you could be eaten alive.  That 50k profit quickly goes negative. I recommend the first thing you do is get a contract contingent on getting approval from the Building Department to be able to do what you think you want to do then go from there. The Building Dept, Planning Dept and Zoning Depts favorite 5 words are, "No you can't do that".  Good luck 

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  • Donald Capwell
    OP
    Rental Property Investor · Mesa, AZ · Member since 2015 · 149 posts · 52 votes
    10y

    thank you for you input, @Trent Currie!

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  • Rachel Pervis
    Real Estate Consultant · Houston, TX · Member since 2015 · 172 posts · 51 votes
    10y

    Hi @Donald Capwell if I could make $50K I would do it, but first I would have someone do a Cost Approach to value without ordering a full appraisal to determine if I could actually get that amount based on the sales comps after it's built and of course I would crunch other numbers. I have heard different things about how much builders actually make on the houses they build. I remember one situation where someone I knew had a relative that was building in a really nice neighborhood in Houston and he built 10 houses and made a $10,000 profit on each one and the houses in this NBHD were selling for $300,000-$500,000.

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  • Donald Capwell
    OP
    Rental Property Investor · Mesa, AZ · Member since 2015 · 149 posts · 52 votes
    10y

    thank you for the info, @Rachel Pervis... I'm really surprised at the low margins mentioned from those with experience, but it is all valuable info!

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  • Mahesh P.
    Northern, NJ · Member since 2014 · 18 posts · 0 votes
    10y

    Great discussion here and definitely very valuable to something I am thinking in the northeast. Very difficult to acquire properties in good neighborhoods at substantial discount.

    A quick question to you all.

    If a house is rebuilt on existing foundation, what is the age of the house? vs starting from a lot and developing the lot. 

    Can I rehab a home from a ranch to colonial and call it new construction? Thanks.

    MP.

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  • Rachel Pervis
    Real Estate Consultant · Houston, TX · Member since 2015 · 172 posts · 51 votes
    10y

    Hi @Mahesh P. what I've typically seen is if the existing foundation is used typically the frame of the house remains meaning the house is taken down to the studs and then  everything new is installed. When this happens it's not considered new construction; however in appraisal terms there will be an effective age for the home, which would be more recent then the actual age of the home. The logic behind not using an existing slab to build new construction is you would have a new home on an aged slab that could ultimately lead to foundation issues for your new home. 

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