Buy a dream house? in this market? For some buyers, a remodel or teardown makes more sense

Struggling to find your dream home? Join the club. If you can’t find the right house in the right place, a demolition could be a viable option. You can also buy a house that needs a little TLC and then remodel it. How to choose?

Even with interest rates rising and demand slowing, the housing market is still on fire. Available housing is scarce in many markets, particularly in neighborhoods with good schools. If you’re looking for a property in a prime location, such as on the seafront or within walking distance of the city center, your options are even slimmer.

The lack of inventory is causing frustrated buyers who would have preferred to buy new or newly renovated homes to consider older or dilapidated homes. As a result, some real estate agents market their listings as renovation or demolition opportunities.

Lauren Ravitz, an agent for Berkshire Hathaway HomeServices in Los Angeles, last year represented the buyer of a home in the Brentwood Park neighborhood listed at $6.595 million. It was a 1949 colonial house on a lot with mature trees near shops and restaurants. The home was marketed as “a rare opportunity to restore/remodel a timeless classic from a bygone era or to build a magnificent estate in one of the West Side’s most desirable locations.”

The house sold for $6.795 million to a buyer who plans to tear it down. The site is in a neighborhood with homes valued at $15 million to $20 million, Ms. Ravitz said, so it was “ripe for a teardown.”

In fact, the value of other homes in the area is one factor buyers should consider in determining whether a demolition makes financial sense.

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“Whether you completely rebuild or remodel, the finished home shouldn’t be worth more than three to five times what you paid to buy the demolition,” said Ken H. Johnson, Ph.D., a real estate economist at Florida Atlantic University. . in Boca Raton, Fla. “Otherwise you could develop too much house for the neighborhood.”

But some homes are in such poor condition or so outdated that the cost of remodeling them would exceed that formula.

Craig Jones, a broker associate with Premier Sotheby’s International Realty in Naples, Florida, recently sold a five-bedroom home on a 1.6-acre lot with 189 linear feet on the Gulf of Mexico for $24.5 million. The house was built in 1956 and did not meet current construction standards for waterfront homes.

Ms. Jones expects the buyer to demolish the house and replace it with a mansion of at least 7,000 square feet. She said the new house will likely be elevated, two stories above garage level.

“The house must comply with FEMA requirements for homes built in flood zones, with piles of a certain depth and concrete walls, as well as with the latest hurricane standards regarding the materials used and construction techniques for the structure and ceiling. ”, said Mrs. Jones.

Another alternative is to buy a house that needs repair and reform it. Some houses have historical value, were designed by a renowned architect, or have unique architectural details that need to be preserved. The house might even be protected by a historic designation. “By ‘demolition’ we don’t mean a beautiful old house that we all wish would stay,” said New York City architect Andrew Franz. “A demolition is not worth saving, whether they were poorly built or not energy efficient or architecturally valuable.”

Here are some things to consider if you’re thinking of buying a house for demolition or renovation.

Don’t forget an inspection. Don’t skip the home inspection, even if you’re planning to renovate or tear down your existing home. The demolitions are often older homes and may have been built with hazardous materials such as asbestos or lead paint. If these materials are present, demolition and disposal costs will skyrocket. Underground fuel tanks can also complicate things. A home inspection will provide you with the information you need to make an informed decision about the risks and costs of proceeding with the purchase.

Be prepared to pay cash for a teardown. A conventional mortgage on the property you are buying for demolition will not be available. After all, what bank would lend you money and guarantee a house you plan to demolish? Instead, Patti Lotane, mortgage loan officer for Cape Cod 5, a state-chartered savings bank in Chatham, Mass., said most people pay cash to acquire demolition property, either with cash on hand or equity taken from your main home. through a cash-out refinance or home equity line of credit. Then, she said, after the acquisition, the buyers will apply for a construction loan to cover the cost of demolition and construction. Construction financing could be available to cover the initial purchase, Ms. Lotane said, but the buyer would need to have all the plans and specifications on hand at the time of the mortgage application, as well as a signed agreement with the contractor. who builds the building. House.

Find out about local building codes if you’re planning a major renovation. “In most municipalities in Florida, and probably most municipalities across the country, if the cost of the improvements you are making exceeds 50% of the pre-construction market value of the existing structure, it will ask you to fit everything to code,” said Brian Grossberg, co-founder of Azure Development in Delray Beach, Florida. So if an existing house (not including land) was worth $2 million and you plan to renovate it at a cost of $1.1 million, you will need to bring it up to code. And, Grossberg said, for a house on the coast, that cost could be prohibitive because you’ll need to raise the height of the building. In that case, it makes more sense to tear down the existing structure and start from scratch.

With the average 30-year mortgage rate rising to 5%, home ownership may now be out of reach for millions more Americans. The WSJ’s Dion Rabouin explains the impact for potential buyers, sellers, and the real estate market. Illustration: Adele Morgan

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