Knock Down Rebuild vs. Renovation

knock down rebuild vs. renovation

"Teardowns only happen for lack of vision."

I made that bold statement recently when advising a South Tampa homeowner, who was considering a knockdown-rebuild of a 1960s-era home. I might have overstated my position a tad. I’m sure there are at least a few cases in which a teardown makes sense, but they are the exception and not the rule.

Teardowns happen because better options aren’t immediately clear. Faced with what seems like an endless list of renovations, homeowners start thinking, “Maybe we should just start over.” In a neighborhood that is experiencing significant teardown activity, herd mentality also takes hold. “If they did it, then it must make sense.” But does it?

If you can establish a plan that can take that existing home and remodel it in a way that takes real advantage of the location and brings the home “up to par” with the neighborhood, remodeling will almost always be the best ROI.

There are two parts to the question: one ethical and one financial. The ethical part deals with things like waste, memories, environmental consciousness, responsibility to the “feel” of a neighborhood, historic preservation, etc. That’s a good discussion to have, but it’s not the one we’re talking about. We’re talking about a teardown making money sense. And In the case of a home that is structurally sound and in overall fair condition, the answer is “probably not.” So, how do so many people end up making the decision to do so anyway? It’s because they don’t have a good alternative.

Let’s look at a few of the excuses used to justify a teardown-and-build-new situation.

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1. The Existing Home Can’t Be Brought Up to Current Standards Cost Effectively

If this were true, old neighborhoods wouldn’t exist. An older home can be retrofitted with smart home technologies, green building products (such as windows and doors) and the latest and greatest finishes with ease.

Even big things such as low ceilings can be remedied. I’ve worked with a number of homeowners who’ve raised the entire ceiling structure by a couple of feet ꟷ still at a far lower cost than a teardown/rebuild. The better solution, however, might be analyzing the data: Does the data support the statement, “Nobody wants these 8-foot ceilings anymore?” Often, the answer is no.

2. The Lot Won’t Support a Bigger Home and the Home Won’t Support a Second Floor

You’ll often find older homes on small city lots that don’t offer much room to grow. If the need for a larger house can’t be ignored, you probably have one option: building up. Unfortunately homeowners are often told by contractors that a one-story home’s foundation can’t support a second floor. That may be true, but don’t let that fact stop you from exploring the possibility of adding a second floor that supports itself.

3. Building Code Limitations Won’t Allow Us to Improve the Home Sufficiently

In some areas, building codes limit the extent to which a home can be remodeled. In federally designated flood zones, for example, a homeowner who improves a home by more than 50 percent of its market value must remodel the entire home to meet new construction standards. In a flood zone that could mean raising the entire house many feet.

Building code restrictions can often be overcome with a bit of vision. The work can often be phased in a way that stays within the building codes. Perhaps certain portions of the work don’t count and can be excluded from calculations, making all the difference. Sometimes the restriction is a blessing in disguise, as it helps the design team find a far less expensive solution!

4. Insuring the Existing Home Costs Much More than Insuring a New Home

Homeowners insurance costs less for a new house. In the aforementioned flood zone scenario, the new house may not even require flood insurance, which could equal a savings of thousands of dollars every year. This savings can, in some cases, be so substantial that it pays a significant portion of the mortgage for the new house!

Monthly cost, however, is only a portion of the financial equation. What is the difference in equity? If the homeowner who built new has $50,000 in equity upon completion while the homeowner who did a major remodel has $250,000 in equity, an insurance savings of $500 per month won’t make up the difference in over 30 years!

5. Buyers Want Brand-New Houses

Again, I’d say to look at the data. Is that really what motivates buyers? According to the Zillow Group® Consumer Housing Trends Report 2017, the primary drivers are location and price point. In the discussion about teardowns, location is a given; teardowns don’t happen in undesirable locations. And when it comes to price point, chances are the remodeled home might be the better value proposition.

6. Building New Offers the Best ROI

Here’s where it all comes down to money. Which option delivers the best overall return on investment? Of course the answer has very much to do with the quality of that original vision.

If you can establish a plan that can take that existing home and remodel it in a way that takes real advantage of the location and brings the home “up to par” with the neighborhood, remodeling will almost always be the best ROI. Just because you see teardown after teardown doesn’t mean that that’s the smart play. It just means people can’t see the better path.

Remember that 1960s-era home I mentioned at the beginning? This is what it looked like on paper:

Teardown and Build a New 2500-Square-Foot Home

As-Is Value of Existing Home and Land: $500,000.00
Cost of Demolition and New 2500-Square-Foot Home: $350,000.00 (minimum)
Value After the Fact (2500 sf): $900,000.00

So that “makes sense” to do, in a way. But compare it to the remodel process:

Remodel Existing 2800-Square-Foot Home and Add 800 Square Feet of Additional Space

As-Is Value of Existing Home and Land: $500,000.00
Cost of Remodeling Project and Additions: $300,000.00
Value After the Fact (3600 sf): $1,200,000.00

While the investment is similar at a total of $850,000.00 vs. $800,000.00 respectively, the equity outcome is worlds apart, with the remodeled property enjoying $350,000 more equity!

These numbers are estimate, of course, as the project is not yet completed and the owners may never actually sell the house, but the numbers are based in reality using a real home and real remodeling plans and real-world limitations.

So, if you’re thinking of doing a teardown, you might want to ask yourself, “Are we sure we have a solid vision for the remodeling potential of this old house?”