Stuck in the Middle: the Plight of the “Near Tear-Down”
While Twin Cites developers — and their clients — are once again on the prowl for tear-downs, unfortunately for would-be Sellers of such homes, not everything qualifies.
In particular, a great many homes fall into a broad gray area, where they’re too expensive for many Buyers to update, yet not cheap enough for builders to profitably tear down.
The typical home fitting this bill is larger (over 3,000 square feet), with a dated Kitchen, several dated Bathrooms, and ancient-but-still functional windows (the mechanicals ain’t so hot, either).
Cost to tackle the above?
Easily $200k (or more).
And that’s assuming that the home isn’t functionally obsolete, i.e., doesn’t have such dated features as one small, hall Bath serving four Bedrooms.
Given the time and money to take on such a big project — or multiple big projects — the discount on such a home usually needs to overshoot the out-of-pocket updating costs by 25% to 50% — more if a pro is going to tackle the job and re-sell for a profit.
Illustration
In practice, the foregoing means that a seriously dated, 4BR/3 Bath home with 3,500 FSF might require a discount of $250k.
If the home’s fair market value as an updated, finished product would be $800k, that means a list price somewhere in the mid-$500’s.
So, why not just bulldoze the home and start over?
Because prices on the block don’t support it.
Assuming the top of the block is $800k or so, developers would need to buy the existing home for under $400k to emerge with a profit.
Result?
Even in a strong Seller’s market starved for inventory, such homes represent a tougher sales proposition, attracting fewer Buyers and requiring longer market time.
See also, “List Price + Updates > New = Overpriced”; “Tear-Down Economics, Circa 2012″; “From Worst to First, or “Housing Leapfrog“”; and, “I Guess it Really Was a Tear-Down (I mean, “New Construction Opportunity”)
