A house that may be a good candidate for a teardown is in a desirable location but below the standards of the other homes in the neighborhood. It may be much smaller than average, have serious structural problems, require too many repairs, or have outdated heating, cooling, plumbing or electrical systems. It tends to be priced below the average for the neighborhood and often remains unsold for longer periods, unless it actively marketing as a prospective teardown.
A Rule of Thumb to help determine if a teardown will support a newly built house is when the value is at two to three times the price of the teardown house at acquisition. For example, if you can buy an older, functionally obsolete house in a good location for $250,000 and a brand new house built on the same lot will support a market value of $500,000 to $750,000, it may be a good teardown candidate.
Once you’ve decided on the neighborhood, contact a real estate agent with experience in teardowns or substantial renovations. Realtors can often recommend potential builders for your project or you can contact the local chapter of the National Association of Home Builders for advice. Some mortgage lenders may also be able to provide a list of approved builders they have worked with on new home construction.
New homes are energy efficient, from the roof, windows, and doors to the heating and cooling system, an important feature for home owners today. They are wired for all the in-home entertainment and modern appliances we use today. The interior layout of a new home is customized for the style of living the home buyer wants for their family. For example, many homes are custom built now for multi-generational living. If these features are important and cannot be attained at a reasonable cost by renovating, then a teardown may be the way to go
Buying a house in order to tear it down requires planning, some extra homework and some added expense. Demolition costs vary with the size and location of the teardown property, but generally range from $10,000 to $25,000. You may be able to recoup most of the demolition expenses by recycling some of the materials in the teardown by selling the contents or by tax-deductible donations.
Your municipality will require you or your builder to obtain a demolition permit before you start doing anything. You will need to contact the utilities companies to determine when and how to disconnect gas, electric, water services. Check with the fire department to determine what sort of inspections or oversight is required prior to demolition. Local government may also require inspections for toxic materials inside the house, which is a concern if the structure dates back to the 1960s and earlier, when asbestos was commonly used as a construction material in ceilings & duct work.
Can I finance a teardown?
Absolutely yes! Some banks offer mortgage products for new home construction and have a lot of experience lending on teardown projects. One such mortgage product ideally suited to finance a teardown is a construction to permanent mortgage, sometimes called a “one time close” construction to permanent mortgage.
Each construction to permanent mortgage is structured to meet the specific needs of the borrower. A one time close construction to permanent mortgage makes the financing simple. The borrower can focus on their project with peace of mind knowing both the construction financing and the permanent mortgage are approved, the rate is set and all the details for financing each stage from start to finish have been worked out ahead of time.
ABOUT: Arthur Aranda has over 25 years of mortgage banking experience and works extensively with home builders and homeowners on financing home construction and renovation projects. Aranda is also a Certified Financial Education Instructor and provides First Time Homebuyer Seminars. For more information on construction loans or to schedule a FTHB seminar please call Arthur Aranda at 201-741-1537.