This is part six, of my real estate series which chronicles our adventures selling our house For Sale By Owner, using a rebate realtor to buy a teardown, and building a custom home. This entry covers the teardown phenomenon.
“Have you met them? They’re doing a teardown.” It’s amazing how many people get introduced that way around here. I hadn’t really heard of teardowns until we moved to Vienna. After Fortune ranked Vienna as the number one place to live in the US in 2007 (CNNMoney has us at number 3 this year, up from 5 last year), a lot of people came househunting here, loved the schools, loved the neighborhoods, loved the downtown area and the great parks and rec services, but the little 1950-1970′s ramblers? Those they did not love.
Vienna looks a lot different than it did when we moved in in 2007 (on the advice of that Fortune article). Over a dozen independent builders have been rapidly buying up ramblers, tearing them down and replacing them with new millenial craftsmen and colonial homes. Yay! Pack them in like sardines, right? Row upon row of McMansions squeezed onto tiny lots window-to-window, go! False. Vienna was very quick to pass an anti-McMansion statute which allows you to cover only 25% of the lot with a structure–including patios and driveways in most instances. Sorry, guys. You have to have a yard to live here. And in most cases it has to be 24 feet from the next house, so
your aluminum can telephone is going to need a long rope your kids may have to text the neighbor kids to come over instead of just knocking on each other’s windows. Oh, and it has to have trees. If you take out any trees in your construction, you must leave enough trees or plant new ones to show you expect a 20% lot coverage of tree canopy within 10 years. Hopefully, these restrictions will keep Vienna high on the best place lists for decades to come.
Most of these new builds fall into four categories:
Spec Homes: A builder purchases a lot, tears down the old building, builds a new house of his own design and puts the new home on the market during construction or after completion. Such homes are called “spec houses” because the builder is speculating on his own money. There are wonderful spec homes in Vienna in the 1.1m to 1.5m range. I love going to their open houses for ideas. In spec homes, the builder will mark up the value of the land, the materials and the labor to sell the home at top market value.
Builder Lots: Sometimes a builder will buy a lot and hold on to it until a buyer signs with him who wants to use it. This way, the client can customize the home with the model and finishes they want. Since the builder will mark up the land, material and labor value, the price is comparable to spec homes, but you may get a lot more customizing options, depending on the builder.
Lot Purchase: A client independently purchases a lot then hires a demolition company to tear down the house and a builder to put up a new one. In addition to a greater number of options choosing the lot, the model and the finishes, the homebuyer saves money on the land mark-up as well as the construction. Because the builder is not carrying the land or the structure at his own hazard, he is usually willing to build the same house at a discount on your own lot. This is the option we chose, so I will focus on lot purchases.
Your Lot: This option is the most financially advantageous to the homeowner. An original owner of one of these ramblers will usually have enough equity in the house to use it as a huge downpayment on the new home without any outlay of cash, and will often capture several hundred thousands of dollars in the process. We totally would have torn down and built on the lot that we owned–if it had not been a townhouse. :(
Why don’t you just buy a move-in-ready house next to the Jensens and McArthurs in their garden of Eden complex and live happily ever after? We almost did. I still drive by there all the time torturing myself that I gave up the community pool and the neighbors. Yeah, girls. That’s me casing the street again. /wave.
Teardowns are like a disease here that you catch from friends. Those who have done it have made money and are living in new homes they love, so they proselytize quite naturally. Some have done it more than once. Some use teardowns as an investment strategy, selling the homes instead of living in them. It’s the far end of the flipping spectrum. I caught the teardown bug from friends about 2.5 years ago and have been twisting this notion around my fingers ever since. After looking at many home models and floorplans online, I had some pretty set ideas about what I wanted in a house. Touring older homes was a big disappointment. Many of them needed work. Those that had already had work done still had fundamental layout issues and low ceilings. Oh, the low ceilings. After our soaring singer ceilings in the townhouse, these 8ft ceilings seemed to press down on our heads.
So I started taking Kent to open houses of new builds with high ceilings, large windows, open floor plans and master suites. Kent not only came on board, he kicked me out of the driver seat. When push came to shove and I wanted to chicken out, Kent put his foot down. By then he’d also seen the money to be made in teardowns, and the best compromise I could get out of him was “I will pretend to think about buying an existing home.”
Did you mention money to be made? I did. There are a lot of variables in how much equity you can create with the teardown strategy. To maximize profit, you want to get the lot at a great price (this was much easier 3 years ago than today), get a good price from the builder, and build a home that will have a high resale value. I don’t have hard numbers to give you an average, but anecdotal evidence suggests many people are making $100k-$300k in equity on a lot of these teardowns. New homes in this price range also appreciate quicker than the older homes still standing next to them as well. You can get a lot more for your money if you are willing to go through the painful process of hunting down a lot, living in a rental for a year, and managing at least half a dozen actors who have no interest in getting your project done in a timely fashion than you would get if you bought a pre-existing home or a spec home.
Okay, I want to do a teardown, too! What do I have to do?
Stay tuned for Teardowns 102, with step-by-step information on how to get qualified, chose a builder, find a lot, make an offer, get contracts, get permits, and tear baby tear.
photo by Classic Homes