When is your house a teardown?

I get this question alot from my clients and friends. In the inner suburbs of Northern Virginia and the metropolitan Washington Area renovation and potential redevelopment is always a possibility. Generally, the older the housing stock, the smaller the house, and the better the lcoation the higher the probability that your house could be a potential teardown.

The reason someone asks me this question is usually they are starting to notice that some houses in the their neighborhood are being torn down rather than just remodelled or renovated. Your house is about 30 years old and you are wondering whether you should spend your money to renovate a kitchen or a bath or would your time and money be better spent selling your house and finding a house that is already remodelled.

The answer as is usual with real estate is mixed.

1. Do you love your neighborhood and can't image wanting to live anywhere else?
2. What is the tax assessment on house?
3. What are similar unimproved homes selling for in your neighborhood? Is the price trend generally up?
4. How long do you expect to stay in your house?
5. How much would your remodel or renovation cost?
6. If you spent the money to remodel your place, what would it be worth afterwards?
7. How much would another house you would like in your neighborhood or elsewhere that you would like to live?
8. What is your personal tolerance for stress and coming home every night and waking up every morning to dirt, noise and uncertainty?


Okay so those are most of the questions, what are the answers?

If you don't want to move out of your neighborhood and can't find another house in neighborhood you want to buy. Then you should probably renovate. Rather than do a modest renovation you may wish to consider renovating your home to a level in fit and finish to the other new homes in your neighborhood.

Why do I mention the tax assessment on your property as a factor? Generally, most assessment in this area are split out into a value for the improvements and a value for the land or dirt. The rule of thumb is that if your house (improvements) is less than one third the value of the total tax assessment than you are hovering on a Teardown. For example. Your current tax assesment is $600,000. The tax assesor as attributed $150,000 to your improvments and $450,000. You are definitely a teardown candidate.

 If new houses in your neighborhood are selling for $1,200,000, you need to look at the cost to the builder. Here are some assumptions the builder makes and how he  makes his money. Again use the one third analogy. If a builder sells a house for 1,200,000. His proforma are based on thirds. One third of his money goes into the land purchase, one third goes inot the materials and labor to build the house and one third goes into his pocket. Lately builders have not been able to make the profits they traditionally wanted to so this formula maybe a little off balance, but in traditional markets it generally hold true.

So where does this leave you?Would putting $400,000 into your home yield you a house that would sell in your neighborhood for well over  $1,000,000? Assume there will be up to 20% cost overuns on your improvements and that if you sell your home impoved it will cost 6% of the sales price to sell your home. Plus the intangible of stress, incovenience and time you have spent remodelling your place.

Are unimproved houses going for the tax assessment or less? If they are then you need to take a very hard look back at how your tax assessment is assigned. Look back at those ratios of improvement versus the land.