The value is in the land.
That phrase is often the structural kiss of death to a home. It’s a statement on the multiple listing or in advertising that lets a potential buyer know this property is teardown country.
But what makes a home a potential teardown? Is there a formula for an owner (or buyer) to determine whether a house is worthy of another resident, worth fixing up or merely worth the space for a new, usually larger and much more expensive home?
First, you need to know how much new-construction homes are selling for in your neighborhood, real estate agents say. If, for example, most are going for $600,000, your house might need to be worth more than about $200,000 to avoid being considered a teardown. That’s because the rule of thumb is that a new home should cost two to three times the value of the land to construct, says Donna Ivanisevic of Prospect Equities Inc., Hinsdale. Homes in that tony western suburb ranging from $300,000 to $650,000 could be considered worth tearing down for larger ones, she said.
But what if the seller has made substantial improvements in the home? Would it still end up as a teardown?
“I’ve had listings where what is invested in the house exceeds what it’s worth,” says Jennifer Ames, an agent with Coldwell Banker in Chicago. “One cannot assume that what has been spent on the house will determine its price. The market weighs the utility of the house with the price.”
Looking at a property from a developer’s viewpoint, Ames says, the formula in Chicago is that the price of the property where a new home will be built should not exceed a third of the total price of the new home.
But, there are factors that can affect that formula and the price paid, she says. One is the size of the lot. “People will pay a premium for an oversized lot [in the city]. Even an extra 5 feet in width” may make the property worth more.
Two consecutive lots can also command higher prices because the home that is built on them can fetch above-market prices. That’s because it no longer has to fit onto a narrow space, and its design is much more flexible with the width allowed on two lots, Ames says.
“There’s a huge amount of inventory of high-end homes” on the market, says Laura Lamendella, an agent in Chicago with Koenig & Strey GMAC. “But, it’s the new homes that are selling.”
That might partially explain why tearing down a house and building new might be the better choice for a buyer.
But there are ways to have a “new” house and avoid city setback rules that are stricter than the homes they replace. Lamendella gives one of her listings as an example. A Roscoe Village cottage that’s substantially new was gutted in 1998, keeping exterior walls and avoiding setbacks that would have rendered a new house smaller than the 3,500-square-foot one (including the lower level with family room) that resulted. Asking price: $1.189 million.
The rising cost of land isn’t limited to close-in neighborhoods. One Rogers Park bungalow was recently advertised as a “development opportunity,” for $525,000, and 33-foot-wide vacant residential lot in West Rogers Park was offered by owner for $299,000.
But Lincoln Park is especially pricey. On certain blocks in Lincoln Park, especially Burling and Orchard Streets, Lamendella says, a lot or property for teardown can fetch close to $900,000.
Remember when $1 million bought a mansion, rather than a lot?
– Even today $7.5 million houses are not a dime a dozen in the Chicago area. And, new ones at that price — actually $7.499 million — are even rarer. That’s what makes the house, at 580 Woodland in Lake Forest stand out. That plus the fact that developers Jan and Donald Zordani of Milestone Development LLC built it on spec — that is, without a buyer. Outside, the house, marketed by Koenig & Strey GMAC, evokes the feel of a French manor home. Inside, there are antique mantels and chandeliers, marble floors and walnut paneling, according to marketing information. Plus, there are the musts: wine cellar, home theater, heated stone floors, steam showers and an elevator.
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Wayne Faulkner is editor of Real Estate. You may contact him at [email protected].