Construction Loan Center

Knockdown and Rebuild: Is it for you?

Would you buy a house you couldn't step foot in? If you want to purchase a home in a hot real estate market that has a limited supply of properties, it may be a viable option. Over the past few years, there have been a growing number of real estate buyers actively looking for condemned or outdated houses that can be completely gutted out or demolished in order to build a bigger, more modern home in its place.

The idea is certainly enticing: you can snatch up a rundown place in a good community for way below the average market price and then invest some time and money rebuilding or renovating it. In the end, you'll have the home you want, and it will be worth much more than what you paid for it. But while this strategy may get you into the area you desire, rebuilding is not an easy process, and it is certainly not for everyone.

Is it worth it?

In order to decide whether the knockdown and rebuild strategy is for you, you first have to consider things like the value of the property and the neighborhood you are looking at as well as the costs of renovation. Often the value of the lot the home is on can be worth a ton of money, especially in affluent neighborhoods. Just keep in mind that in areas where real estate values have increased significantly and are approaching a peak, even a remodel that seems reasonably priced may be too expensive.

Moreover, if the home has hazardous material, such as asbestos and lead paint, then you need to factor in the cost for its removal. You also need to consider whether you are gutting out the home, demolishing the home but leaving the foundation, or demolishing a home and removing the foundation. Each option has different costs. If you discover that the home needs significant structural improvements, such as plumbing and electrical system overhauls, foundation upgrades, and major problems with the roof or the walls, then demolishing the structure is probably the better option. But, this will come with a higher price tag.

If you are not sure whether getting rid of the old home is really your best option then make it a point to consult with professionals who can help you with your decision. Speak to real estate agents who know the market as well as home inspectors and building professionals who can point out potential problems and offer a rough cost estimate to either fix existing issues or completely start a new home from scratch. The point is, you need to do your research. Don't just jump at a listing because it's cheap.

Bottom line: be real with the costs and your reasons for choosing the property. While there is certainly some room for more subjective values, such as choosing the neighborhood for its school system, the surroundings, or its close proximity to your place of work, don't be blind to the details of the purchase, either.

Are Construction Loans and Mortgages within Your Reach?

Financing is definitely more complicated if you are planning on doing a major rebuild or remodeling job. You have to factor in the cost of the existing house, the demolition expenses, and the construction costs. On top of this you will need to secure long-term construction and take out financing.

Buyers looking to rebuild or significantly remodel a home can take out a construction loan. These short-term loans cover the cost of construction, and an added bonus is that the lenders usually take over the management of contractor payments throughout the construction process. Construction loans can sometimes also roll over to a standard mortgage, an option called a construction-to-permanent loan.

A home construction loan calculator can help you figure out a construction loan amount or payments during construction as this is a little more complicated than a standard home mortgage. 

However keep in mind; if you are dealing with credit issues or you lack sufficient income, then you may have a hard time qualifying for such financing. These loans tend to be considered higher risk by banks and lenders and are thus a bit harder to get. Even if you do qualify, you may find yourself in trouble if unexpected issues pop up and you don't have enough equity to cover them. The point is that you need to be realistic- not just over how much you can afford, but also how likely a bank or a lender will fund your project. So, make sure you speak to a lender before you dive into the process.

Can You Handle the Process?

Building or significantly remodeling a home is a process that will demand a big commitment of time, energy, and money- much more so than a standard purchase. A large-scale home construction job can take many months, if not a year or maybe a little more, to complete, and it will be one of the main focuses of your life during that time. If you are completely demolishing the home then be prepared to run around for permits and to tackle a whole bunch of local restrictions in terms of zoning and maybe even historic preservation. Be prepared to also devote a considerable amount of time to closely supervising contractors or even working on the home yourself if you plan to do some of the renovations on your own.

In short, knockdown and rebuild may be a good option to get into the community you want, but you have to go into the process ready to work and fully aware of the risks and benefits involved.