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You are here: Home Real Estate Teardown Economics: How Much Profit is There?
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Teardown Economics: How Much Profit is There?

WeinbergWith six more teardowns under consideration by the Committee for Historic Preservation on June 17 and two homes already demolished in the past few weeks in my neighborhood, I started to wonder about the economics of buying an existing home, tearing it down and building a new one. From the number of teardowns I see, I could only assume that this must be a highly profitable venture for a developer. But just how profitable?

I asked a local builder for an estimated cost per square foot to build a new home in Scarsdale and he said it could vary from $200 to $600 a square foot, but said that a builder who wants to make a buck could get the job done for $250 per square foot. Using this estimated figure I looked at several recent teardown/build jobs in Scarsdale to see what I could surmise about the bottom line for the builder. Keep in mind that these figures do not include the real estate taxes the builder may have paid during the construction period, which appears to be around 2 years. Other costs that may not be included are agent fees (5%), as well as landscaping and carrying costs if the builder mortgaged the property.

Here are a few scenarios:

11DickelRoad11 Dickel Road: A 2,911 square foot house at 11 Dickel Road sold for $1,010,000 and was replaced with a 7,273 square foot house that was purchased for $2,775,000 in December 2013.

Purchase price of original home: $1,010,00011dickelold
Estimated construction cost at $250 per square foot: $1,818,250
Total Cost: $2,828,250
Sale Price: $2,775.000
Net Profit: $($53,250)

13DickelRoad13 Dickel Road: Next door a 3-bedroom home at 13 Dickel Road sold for $1,250,000 in October 2012 and was replaced with a new 6,806 square feet home that sold for $2,6000,00 on June 5, 2014. This one may have not been a total teardown:

Purchase price of original home: $1,250,000
Estimated construction cost at $250 per square foot: $1,701,500
Total Cost $$2,951,500
Sale Price: $2,600,000
Net Profit: ($351,500)

346 HeathcoteAt 346 Heathcote Road the original home built in 1929 sold in 2012 for $550,000. On only .17 acre the builder put in a 4,350 square foot home which sold in February 2014 for $1,800,000

Purchase Price of Original Home: $550,000
Estimated construction cost at $250 per square foot: $1,0875,000
Total Cost: $1,637,500
Sale Price $1,800,000
Net Profit: $162,500

At 17 Continental Road in Scarsdale, a new 5,667 square foot home replaced a home that was sold for $999,999 in 2010.

Purchase Price of Original Home: $999,999
Construction cost at $250 per square foot: $1,416,750
Total Cost: $2,416,749
Sale Price: $2,300,000
Net Profit ($116,749)

From my estimates, the economics of teardowns are a mixed bag. It appears that they a better deal for the Village than the builder as the Village collects building fees, subdivision fees and then increases the real estate taxes on the home dramatically when it is built.

But perhaps I have over-estimated the costs to the builder – because if these numbers are accurate, why would the demolition derby continue?

Sales:

3OakLane3 Oak Lane: Magnificent Fox Meadow stone and stucco English Manor sits on .71 flat acres. Every room is generous and graced with natural light offering unprecedented quality and artistry with solid 8 panel oak doors, original hardware with locks and skeleton keys, grand main stair with oak posts, Oak paneled study, high ceilings and ornamental mouldings, custom kitchen by St. Charles with attached 3 car garage. New buyer is only the third owner of this exquisitely maintained prime residence.

Sale Price: $3,725,000
Real Estate Taxes: $51,822

13 Dickel Road: (pictured above) Superbly crafted colonial with 6 bedrms and 5 1/2 baths on .44 acre. Grand entry, living room with fireplace dining room with coffered ceiling, huge chef's kit, mudroom, attached 2 car gar, backstairs to guest room/home office. Family room with doors to patio and library. Second floor :master bedroom suite with tray ceiling/bath/WIC, 3 bedrooms/2baths, laundry rm. Lower level: high ceilings, playroom, exercise room, bedroom/bath.
Sale Price: $2,600,000
Real Estate Taxes: TBD

17Magnolia17 Magnolia Road: Sun-drenched, tastefully updated three bed, three bath ranch. Wood floors on entire first level. California outfitted closets! Enjoy entertaining in elegant living and dining rooms. Kitchen renovated in 2008 with custom millwork, stainless steel premium appliances, granite countrs, built-in speakers. New mahogany deck with outdoor speakers. Professionally landscaped backyard is an idyllic setting for family BBQ's. Lush gardens include lawn sprinkler system and outdoor lighting.

Sale Price: $1,076,000
Real Estate Taxes: $21,227

125Brite Avenue125 Brite Avenue: Wonderful opportunity to live in the heart of the Greenacres. Situated on .30 acres. This all brick 5 bedroom Center Hall Colonial has great curb appeal. This pretty home boasts hardwood floors throughout, a wood burning Fireplace, High ceilings, Large oversized windows and a bright and airy sunroom off the Living Room.

Sale Price: $1,315,000
Real Estate Taxes: $24,018

3LebanonRoad3 Lebanon Road: Meticulously improved, beautiful 3 bedroom home on a quiet and highly desirable Scarsdale street, two blocks from the elementary school and close to shopping. Updates include: chef's kitchen with Viking stove, Sub-Zero, Bosch dishwasher, granite counters, 2004 roof, 2007 Hot Water heater and furnace, 2013 premium washer/dryer, 2011 a/c compressor, 2004 Alarm, 2012 Garage door. Bright and open floor plan.

Sale Price: $1,150,000
Real Estate Taxes: $24,078

132Longview132 Longview Drive, Edgemont: Totally renovated and expanded in 2012-13. Crisp and sparkling. Stainless steel kitchen appliances, granite counter tops, large breakfast area. Mud room with access to yard. Master bedroom suite with vaulted ceiling, Juliet balcony, en-suite bath with marble enhancements. Hardwood floors, Hunter Douglas shades throughout. Recessed lighting, custom closets, new windows, new washer/dryer, 2 zone heat and air conditioning, new furnace.

Sale Price: $1,170,000
Real Estate Taxes: $18,231

33WalbrookeRoad33 Walbrooke Road, Edgemont: Sunny and spacious, renovated Tudor in Old Edgemont. Gourmet kitchen with center island that opens to sunlit family room with doors to private patio and yard; elegant formal dining room, living room with fireplace, Library. Laundry on main level, MBR suite with renovated bath, amply sized family bedrooms, renovated hall bath and third floor bonus room with new bath. Hard wood floors, Marvin windows, new generator and boiler, radiant heat in bathrooms.

Sale Price: $1,435,000
Real Estate Taxes: $34,502

Featured Listings:

HoulihanLogo201472 Mamaroneck Road, Scarsdale: Bright and elegant, this renovated 72MamaroneckTudor with slate roof is set on over an acre of lushly landscaped property in Scarsdale's prestigious Murray Hill section. Among the many amenities and improvements is a three room guest wing with ADA bathroom and a separate entrance. The foyer opens to a gracious dining room perfect for large gatherings and an elegant living room. A spectacular family room opens to magnificent formal gardens and a beautiful pool with its own cabana and kitchenette. The kitchen has an attached breakfast/great room drenched with light. All of the bathrooms and kitchen have been renovated. Upstairs is a master suite like no other with his and her dressing and bathrooms, walk-in closets, a porch overlooking the property and a library that leads to a fantastic sitting room/office complete with gas fireplace and custom built-in desks. There is an enviable wine cellar in the lower level as well as laundry and play area. This is a masterpiece waiting for its new owner. Learn more here

List Price: $5,250,000

HoulihanLogo201445 Colby Lane, Scarsdale: This fabulous home with pool and exquisite plantings45Colby is situated on 1.26 flat acres on a tree-lined street. Fully renovated with beautiful details and high ceilings throughout. The first level boosts a spacious master bedroom with two baths, dressing room and doors to yard. Three additional bedrooms, two baths, a Christopher Peacock kitchen with Viking appliances, breakfast room with doors to patio, family room with fireplace, doors to yard and cathedral ceiling, bath, powder room, laundry and back stairs complete this level. The second level has two en-suite bedrooms, gym, cedar closet, bath, office/bedroom, and playroom. The lower level offers a media room, powder room and storage. Learn more here:

List Price: $5,099,000

Comments   

0 #7 Garrett 2014-08-26 17:54
Thanks for finally talking about >Teardown Economics: How
Much Profit is There?
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+1 #6 In the Know 2014-06-13 16:13
I like this article because it exposes some basic contradictions on the surface of house development costs.

However, the economics behind this are more deceiving than you might suspect. No average house in Scarsdale has a wholesale cost of over $1 million to put up. In fact, most cost well under $500k. You can even look at homeowners insurance policies as a control (but watch out for over insured homes!), you can get a policy based on a rebuild cost (+ possession costs) for around a $500k value!

No developer that knows his or her business is going to take on a project with a real loss, so even if a project's real costs exceeds my low numbers and profit margins look slim, look to other tricks of the trade to find the profits. Retail prices are different from real costs; many retail prices include service fees paid back to the developer, by the developer. Some industries call this padding. Others might call it a legal kickback. There's lot's of markup involved, so just keep in mind that even if appears on paper a developer is taking a loss, that's likely after they already had taken a gain. Other tricks include listing high costs as tax write-offs. These sort of strategies could make one feel inclined to develop all their projects at a loss.

Real losses that a developer would likely prefer to avoid come into play when they get stuck with property tax bills on inventory they can't move.
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0 #5 Real Estate Maven 2014-06-13 12:59
The builders in Scarsdale may lack good taste but, especially after the Great Recession, they are not stupid. They are obviously making good money buying the old 1950s splits, ranches, etc. for slightly over a million bucks, tearing them down, putting up 5000-6000 sq. foot houses, and then selling them for $2.5 to $3 million. No one is going to do this unless they can make a couple hundred grand on their spec bet, so obviously they are building these houses for under $250/sq. ft. Moreover, banks don't accept phony, high-ball appraisals any more -- if anything, they come in very low these days. Also, prices and sales in Scarsdale have not been strong this year -- they have pretty much peaked since mid-year 2013. So I wouldn't be afraid of a bubble any time soon.
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+1 #4 wc_guy 2014-06-13 12:14
Scarsdale Homeowner. I'm actually very much with you on the desirability of modern layouts, etc. I don't fault teardowns based on a romanticized notion that "older is better" (I have prior posts expressing that sentiment). That said, on the narrow issue of this post--the economics of teardowns--I think there is an interesting disconnect. I have no issue with someone paying whatever they want for a house, even if I don't find the same value proposition. However, as someone (like you and everyone else) who lived through the last recession and had the privilege of fronting taxpayer TARP money, I *DO* find it problematic if these prices require mortgages, and if the appraisal process is being compromised in any way to get to those numbers. There *are* value benchmarks that appraisers follow: price per square foot being one of the more important governors. As I said, it is no coincidence that the only listings you see that seem to include basements in square footage are these rebuilds (I'd love to hear from a realtor about when that is allowed or not). They do it because no bank/appraiser could use any comp to justify a $700/SF house if homes that are of similar quality (updated kitchens, HVAC, etc) top out at $500/SF. So if your appraiser friend is right, I am not comforted. That's how we got into the last housing bubble.
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0 #3 Scarsdale homeowner 2014-06-13 11:12
My appraiser tells me that new homes in Scarsdale are hot hot hot - and that virtually nothing is getting appraised at under $2.5 million - most are around the $3 million range. Whether the homes are to anyone's taste, it doesn't matter unless you are the one buying the home - apparently there are plenty of people who will pay for new construction that has the floor layout young families want and without the huge maintenance that older homes require. The good thing for everyone else is that for every $1 million teardown replaced with a new $3 million house, the taxes triple and that means everyone else pays a little less.
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+1 #2 Resident 2014-06-13 09:44
These builders are not paying anywhere near $250/ sq ft. There are major economies of scale so an 8000 sq ft house does not cost double a 4000 sq ft house. Also, basements are finished spending at most $100/ sq ft (probably even less).
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+5 #1 wc_guy 2014-06-12 19:45
Two things that I've noticed that may help explain some of the disparity. (1) I've noticed that these new builds appear to always include basement square footage (there is no way that the Dickel property is 6800 square feet, for instance). The cost for rudimentary basement finishing is probably well below $250/sf. that said, it seems that above ground construction at $250/sf is pretty conservative for the contractors we have seen here, so not sure they make it all back. (2) The builders seem to count on *massive* list prices relative to neighboring properties, jacking up the SF totals (how the MLS lets that go is a good question for realtors) to make the per square foot price come in somewhere below $500. I'm shocked that any of these can get a mortgage as I can see no way an appraiser could get to that number. So this works as long as there are buyers in Scarsdale who say they are so desperate for something new that they will pay massively more than the similarly high-end properties next door--for what often look like the blandest siding-laden colonials imaginable. But nothing rewards lazy, uncreative greedy builders more than buyers with more money than sense...
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