How to finance a teardown?

[Anonymous]

(cross posted from money sub)

After looking into renovating our small house and being completely shocked by the prices, we are considering tearing down and starting fresh. It's a small older home with low ceilings, small windows and outdated systems. Several contractors who visited suggested that we were probably better off tearing down and building new. We like the neighborhood. We owe 400K on a house that's worth 1.1 as is; new construction in our area is going for just under 2M. Our lot alone is assessed around 700K.

Seeking recommendations for construction lenders, especially if you've had a good experience with one. We would probably want to use our lot as equity and minimize cash out of pocket to the best of our ability. Also is there any way to keep our existing 2% loan for the 400K?

[Anonymous]

Talk to your current lender about a construction loan. You will likely need their permission to tear down anyway.
Take a HELOC. Ask family.

[Anonymous]

If new construction is going for $2, then the land is probably worth $700k. If your property is worth $1.1, then you would be losing $400k in equity when you raze your house. Your house still has value in addition to the land.

You would be better off selling your house for $1.1 and buying a tear down for $700k in the neighborhood. Then you would probably spend about $900k on construction and it will be worth the target $2 million.

So either way, you end up with a $2 million property, but the way you are trying to do it would cost you $2 million to get there, and the way you should do it, it would cost you $1.6 to get there.

[Anonymous]

Anonymous wrote:If new construction is going for $2, then the land is probably worth $700k. If your property is worth $1.1, then you would be losing $400k in equity when you raze your house. Your house still has value in addition to the land.

You would be better off selling your house for $1.1 and buying a tear down for $700k in the neighborhood. Then you would probably spend about $900k on construction and it will be worth the target $2 million.

So either way, you end up with a $2 million property, but the way you are trying to do it would cost you $2 million to get there, and the way you should do it, it would cost you $1.6 to get there.

If their house has value beyond its land and can sell for 1.1. mil vs 700 then their house is not a tear down in the first place. They just don't like it anymore and want an upgrade. The easiest amove would be to sell it and just buy another house already built or remodeled to their tastes. Also, if the house has value of 400K, then how is it possible that remodel would be as costly as new construction? Building another level or raising ceilings (a new roof) cannot possibly cost 1.6 mil.

[Anonymous]

Have you looked into a modular bump out addition?

[Anonymous]

Anonymous wrote:

Anonymous wrote:If new construction is going for $2, then the land is probably worth $700k. If your property is worth $1.1, then you would be losing $400k in equity when you raze your house. Your house still has value in addition to the land.

You would be better off selling your house for $1.1 and buying a tear down for $700k in the neighborhood. Then you would probably spend about $900k on construction and it will be worth the target $2 million.

So either way, you end up with a $2 million property, but the way you are trying to do it would cost you $2 million to get there, and the way you should do it, it would cost you $1.6 to get there.

If their house has value beyond its land and can sell for 1.1. mil vs 700 then their house is not a tear down in the first place. They just don't like it anymore and want an upgrade. The easiest amove would be to sell it and just buy another house already built or remodeled to their tastes. Also, if the house has value of 400K, then how is it possible that remodel would be as costly as new construction? Building another level or raising ceilings (a new roof) cannot possibly cost 1.6 mil.

Also, tearing down a home always involves destruction of the lot and its landscaping, which is costly to restore. A remodel can be done around it, where you aren't destroying all of your land features and having to buy everything again. You also may not even need to move entirely out of your home if you can live in the basement or at least move your stuff into the basement vs. having to hire movers. Tearing down your home costs a lot more in many ways. I know people who had done a floor addition and almost gut renovation of their main level and lived in the basement that entire time saving money on moving and rent elsewhere.

[Anonymous]

A lot of times when people want a brand new home or significantly upgraded home they just sell their old house and move to a new one in the area, because making one time move is a lot easier on the family than moving out, settling elsewhere for a year, then moving back with all the stuff again.

[Anonymous]

We looked seriously at this and ended up going the tear down route. Your numbers are actually in the range where it can make sense.

For lenders, you want a construction-to-permanent loan. A few that come up a lot around here are U.S. Bank, PNC Bank, and Wells Fargo. Also check local credit unions. The key is finding one that will give you full credit for your lot value as equity and offer a one-time close.

With a $700K lot, you are in a strong position. Many lenders will treat that as your down payment, which can significantly reduce how much cash you need to bring in.

On keeping the 2% mortgage, almost certainly no. The construction loan will pay off your existing loan, and lenders will not leave a low-rate mortgage in place on a property being torn down.

One thing to keep in mind is that the numbers tighten up fast. Demo, permits, rent during construction, and higher interest rates add up. It can still work, especially if you plan to stay long term, but it is not as wide a margin as it first looks.

[Anonymous]

Anonymous wrote:Have you looked into a modular bump out addition?

OP wants to increase ceiling height, this won't help unless you replace the roof. Apparently OP priced out the remodel they want. And it didnt compare favorably to a new build. It seems like OP wants and entirely different home if remodel is so costly and extensive. They may be better off selling and buying a new home or a remodeled older home that's already to their tastes, or smth that's easier to remodel.

[Anonymous]

Anonymous wrote:We looked seriously at this and ended up going the tear down route. Your numbers are actually in the range where it can make sense.

For lenders, you want a construction-to-permanent loan. A few that come up a lot around here are U.S. Bank, PNC Bank, and Wells Fargo. Also check local credit unions. The key is finding one that will give you full credit for your lot value as equity and offer a one-time close.

With a $700K lot, you are in a strong position. Many lenders will treat that as your down payment, which can significantly reduce how much cash you need to bring in.

On keeping the 2% mortgage, almost certainly no. The construction loan will pay off your existing loan, and lenders will not leave a low-rate mortgage in place on a property being torn down.

One thing to keep in mind is that the numbers tighten up fast. Demo, permits, rent during construction, and higher interest rates add up. It can still work, especially if you plan to stay long term, but it is not as wide a margin as it first looks.

He has a $700k lot with a $400k mortgage. The house on the lot is worth $400k, which he wants to raze.

[Anonymous]

Anonymous wrote:We looked seriously at this and ended up going the tear down route. Your numbers are actually in the range where it can make sense.

For lenders, you want a construction-to-permanent loan. A few that come up a lot around here are U.S. Bank, PNC Bank, and Wells Fargo. Also check local credit unions. The key is finding one that will give you full credit for your lot value as equity and offer a one-time close.

With a $700K lot, you are in a strong position. Many lenders will treat that as your down payment, which can significantly reduce how much cash you need to bring in.

On keeping the 2% mortgage, almost certainly no. The construction loan will pay off your existing loan, and lenders will not leave a low-rate mortgage in place on a property being torn down.

One thing to keep in mind is that the numbers tighten up fast. Demo, permits, rent during construction, and higher interest rates add up. It can still work, especially if you plan to stay long term, but it is not as wide a margin as it first looks.

+1. The margins for OPs specific situation are pretty small unless similar new build comps are closer to $2.4-2.5M. The $700K lot value in particular gives me pause as a bit low (crazy, I know, but that should be closer to $1M for a close-in desirable lot). Same for new builds nearby going “close” to $2M - they should be mid 2s or higher for areas with the least amount of depreciation risk. This sounds like a property zoned to Justice or similar to me - I wouldn’t do a teardown for that but to each their own.

[Anonymous]

Anonymous wrote:If new construction is going for $2, then the land is probably worth $700k. If your property is worth $1.1, then you would be losing $400k in equity when you raze your house. Your house still has value in addition to the land.

You would be better off selling your house for $1.1 and buying a tear down for $700k in the neighborhood. Then you would probably spend about $900k on construction and it will be worth the target $2 million.

So either way, you end up with a $2 million property, but the way you are trying to do it would cost you $2 million to get there, and the way you should do it, it would cost you $1.6 to get there.

I agree but I would sell for 1M and buy new for 2M.

[Anonymous]

Construction loan will work off the final apprised value of the new home and you will only need to put down 10% if it's in a good area like McLean or Bethesda