Is your house a teardown candidate?

Many properties are more valuable after the house is destroyed.

By Les Christie, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Thousands on a kitchen remodel? A new deck? Just tear the whole thing down.

That's the conclusion many home owners and sellers are reaching in expensive housing markets all around the nation.

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Some of these older houses are being torn down by their owners who are looking to expand their living space. Others have been sold to builders, who only want the property for the plot.

"Upgrading a house that will only be torn down is a waste of money. You won't get any more for the house. Anything you spend on maintenance will be out-of-pocket," says Andrei Vorobiev, one of the founders of Xchange Properties, which operates Teardowns.com, a Web site specializing in putting builders together with owners of potential teardowns.

According to Vorobiev, small, old houses in hot teardown towns have little chance of surviving after their long-term owners leave. The rooms in these homes may be too cramped and the ceilings too low. There's no easy way to open up the kitchens and dining rooms to form the entertainment spaces popular today. There are no master suites, family rooms or home offices.

"The old houses just don't have all the bells and whistles that home buyers want," says Linda Ritter of Tiburon Homes, which redevelops about 10 to 12 properties a year in the Chicago suburbs.

"Most of the property value is in the dirt," says Brad Crumpecker, of Xchange Properties in Dallas.

Telltale signs

For sellers, the most important element in judging a house's teardown potential is whether the nearby homes have already been treated as such. As Brian Hickey of Xchange says, "We don't target areas until they start being redeveloped."

The second big factor is the size of house. Americans simply want more space and bigger rooms these days. Small houses surrounded by big ones are definite teardown candidates, especially if they occupy oversized lots.

And, of course, the condition of the home counts. But even beautiful homes in excellent shape can be torn down if they meet the first two criteria.

Teardowns only make sense in expensive areas. Vorobiev figures that most of the resulting reconstructions have to sell in seven figures for them to work. Here's how the calculations add up:

A little bungalow costs, say, $500,000 in suburban Hinsdale, where the company operates. The expense of the teardown itself is negligible, just $15,000 or so, according to Bob Moulton, with Long Island based Americana Mortgage Group.

Building a new, upscale house costs about $200 a square foot, $600,000 for 3,000 square feet. So a teardown works if nearby new homes are valued at $1.2 million or more.

For a top-notch, luxury home, the per square foot costs can go to $350 per square foot or more, $1.05 million for 3,000 square feet. So for that kind of teardown and reconstruction, nearby new luxury homes should sell for $1.7 million or more.

Cut selling costs

Knowing whether they own a teardown can save owners money; not only can they defer maintenance costs and upgrades but they need not hire a full service broker when they sell. That reduces the commission, usually about 6 percent of the selling price.

Instead, sellers can approach a builder directly or go though Teardowns.com, which connects sellers and builders and which charges just 2 percent of the sale, a $20,000 savings on a $500,000 property.

Renovate or wreck?

For homeowners who plan to stay in their home, but expand it, teardowns may still be the best option, according to Ritter. "Often, tearing down is cheaper. Zoning laws may require bringing the property completely up to code during a renovation. That's expensive."

Even if renovating is less expensive, when you're done, "You still have the old, deteriorating foundation and walls and the five-foot ceilings in the basement and a floor plan that's a big, fat mess," says Ritter.

Starting from scratch can be cleaner, easier and cheaper.

By the way, for those planning a teardown themselves, don't forget to seek sound legal advice before you act, especially if you still have a mortgage on the property.

"Whenever you take out a mortgage," says Moulton, "the bank is counting on the collateral of the house. They base the loan on the value of the land and the value of the structure. If you tear down the house and the bank finds out, it can recall the note."

That could mean you'd have to ante up cash to pay off the mortgage immediately.

Does that happen? Not often, according to Moulton, but owners who decide to tear down should arrange for a construction loan, which carries a higher interest rate.

Also double check whether the house is in a historic or landmarked district where exteriors can't be altered without approval.

Teardowns are not an option in most parts of the country; it requires a critical mass of density, affluence and house types for the numbers to make sense.

But if you think those conditions exist in your town, it may pay to consider your home's teardown potential.



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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.