Tearing Down the House


By Paul Kleiman

teardown canidate- Encinitas, CA

Homes designed by Richard Neutra, highly regarded as one of the leading architects of the 20th Century have been demolished to build new houses. Many people aren’t happy about any teardown deemed to threaten the character of a neighborhood. But whether the home is an architectural treasure or a 1,200 square foot track house, the decision to tear down and build comes down to two things: dollars and cents.

For years buyers sought teardown bargains because the value of the newly built home was higher. In older neighborhoods, where land is still expensive and homes outdated America has been undergoing a sort of teardown mania.

Take Hinsdale, Illinois, which has gained a reputation as the teardown capital. A third of its older housing has been torn down to build new homes. But with the housing market and economy in freefall and foreclosures at record levels, gun shy lenders balk at mortgage applications from average buyers for teardown and build projects, according to Fred Gottlieb of Open House Realty in Los Angeles.

Many brokers believe it is builders and financially solid investors, not homeowners, who are in the best position to make a teardown feasible. There are many obstacles that need to be navigated to take a property through the teardown process. First, the buyer needs to find a neighborhood where such an arrangement is allowable. Preservationists and neighborhood associations back regulations that make it exceedingly difficult to rebuild on some existing property.

Any building, even old sheds deemed significant to the character of the area, might be protected. Some opponents want new construction to conform to other neighboring homes. Other areas welcome rebuilding as a way to raise tax revenues, renew the area’s infrastructure and housing stock. Studies show that 7 out of 10 buyers want new homes with bigger closets, great rooms and home theaters.

Then, mortgages are needed in most cases for the purchase, demolition and construction, often packaged as “combo” jumbo loans. The wealthy might be in a position to create “home art” that might someday be considered important additions to the architectural canon, but most buyers aren’t.

In today’s marketplace with an increase in the length of time a home spends on the market, builders must factor in the costs of keeping the home until a sale. The mortgage and taxes alone could wipe out any potential profit.

“Most buyers are waiting for the market to completely bottom out, which many Realtors think will be late 2008,” said Gottlieb. The federally regulated jumbo mortgage increase, unless extended won’t be around for those buyers looking to swoop in on a teardown.

Perhaps, the best way for a person of average income to buy a brand new home is to buy a teardown from a builder or speculator, who has built on spec. This option makes sense since these sellers are frequently able to extend credit or assist buyers in procuring a loan.

The FHA increased their maximum loan limit in many large expensive urban areas to just over $729,000 through the end of 2008. The administration’s purpose was to allow owners missing payments in danger of foreclosure a chance to refinance at lower rates. The higher limits theoretically eliminate the need for more expensive jumbo mortgages for many teardowns.

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