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The practice of demolishing a home to build another has changed significantly since the Great Recession. Help buyers understand when it’s smarter to demolish a fixer-upper, rather than remodel it, and learn why it may pay off for you to take on a more active role than the traditional buyer’s rep.
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Monday, March 7, 2016
Author(s):
Barbara Ballinger
Teardowns are hardly new. In the late 1990s and early 2000s, entire blocks and neighborhoods were bulldozed to make room for new, larger, and more luxurious houses. This often made economic sense when the price of land was valued higher than the existing house and where extensive remodeling wasn’t cost-effective. Many saw a higher return on investment when starting from the ground up, says Jonathan Rosen, executive vice president and sales associate at the Rosen/Berry Group, Briggs Freeman Sotheby’s International in Dallas.
But the recession of 2008 put a serious halt to this trend. And even before that, many communities experienced a backlash in response to a wholesale change to the character and scale of local housing stock. With that, many observers predicted the din of hydraulic excavators and other demolition equipment would stop.
But if you look around and listen in many neighborhoods, teardowns have roared back. As the housing market also returns, the same old value proposition comes back into play. And single-family homes aren’t the only teardown target. In Texas, some older condominium buildings are being sold for the same reason — the land underneath has greater value than the housing above, and in this case the individual units. “Owners realized that together they can get more money by selling the building to a developer than they could by each selling” their own condos, says Newt Walker, who owns an eponymous commercial real estate company firm in Dallas.
Yet, there are noteworthy differences this time around. Take time to understand how the market for teardowns — and your role in them — has changed.
Learn Local Rules
Since the recession, many communities have instituted or are considering tougher zoning laws to avoid new houses gobbling up too much of a vacant site, usually by regulating the Floor Area Ratio or FAR. Many also want to stop the practice of subdividing a lot into too many homes.
Staying abreast of these changes can be a full-time job, says Jerry O’Brien, sales associate and new homes specialist at Coldwell Banker Residential Brokerage in suburban Tenafly, N.J. For example, he notes that putting more of the structure above ground can actually buy some wiggle room in the regulations in his area. “While local laws in this area limit the square footage of a new house to 30 percent of its lot, builders now get an additional 400 square feet if they put a garage on grade level versus underground,” O’Brien says. His town is also working to prevent trees from being removed when a house is demolished. If they are, new ones must be planted, or there’s a charge of $250 per tree.
In Los Angeles, anti-mansion ordinances limiting square footage have been in place in certain neighborhoods for about 10 years but are becoming more widespread and strict, says broker Peter J. Maurice, estates director at Rodeo Realty in Beverly Hills, Calif. A home owner can’t get a building permit without approval from the L.A. Department of Building and Safety, and even before that, neighborhoods with design review boards are the first checkpoint in the process, he says. “The goal is to reduce the new homes’ volume or appearance of volume by limiting both the square footage that can be built on a lot and certain features like high retaining walls,” Maurice says. Both tall walls and oversized homes on small lots can dwarf nearby houses and change a neighborhood’s texture, he says. Finally, the city doesn’t leave anything to chance, inspecting work throughout construction to be certain it conforms with the approved plans.
In some locations, such as the village of Larchmont in suburban New York, residents are now deciding how to proceed. When a builder’s plan to bulldoze an iconic 1896 house known as “The Orchard” became public, the board of trustees passed a six-month moratorium this past January and hired a consultant to study its zoning code and mission statement. Home owner Stacy Jamar Caffrey, a member of a citizens’ group, Preserve Larchmont, supports the effort to maintain the village’s existing vintage housing stock and overall character. Meanwhile, the 1.57 acres that the builder purchased for $4.7 million to construct four new homes remains intact.
Arm Your Clients With Knowledge
New trends that have emerged since the recession could influence teardown choices. In Atlanta, neighborhoods like Chastain Park — with its older, more affordable housing on small lots and with high walkability — have now become teardown magnets, says Barbara St. Amant, ABR, with Harry Norman, REALTORS®, there. Some of the new homes going up are actually smaller than the ones they’re replacing. Less has become more, because of both the constricted smaller lots and the buyers who are putting more money into higher-quality construction, says Paul Wells, a broker with RE/MAX of Barrington, a Chicago suburb. Even in Dallas, where big post-teardown houses became commonplace before the recession, this trend is evident. However, everything tends to be bigger in Texas; Rosen says many in the luxury market he caters to now prefer the relatively small 4,500-square-foot house to the homes of 6,000 square feet and up that were once the norm. Los Angeles is witnessing both smaller and bigger post-teardown homes, says Maurice — smaller on infill lots in areas closer to downtown such as Hollywood and larger in areas with more land such as the west San Fernando Valley.
In addition to a shift in average sizes, prepare buyers for more rigorous financial challenges that could push a teardown — or at least a custom-designed replacement — out of their price range. Mortgages have become much tighter, and with the run-up in prices recently, many buyers can’t afford to put 20 percent down, says Hasani Steele, a sales associate with RE/MAX Premier Properties in Chicago. The financial pressure may persuade buyers to favor “spec” homes, which developers can build for as little as half the cost of a custom design. Custom homes lack the economies of scale of spec homes, making it difficult for builders to negotiate prices, and often requiring building components to be shipped individually, which increases costs. “Think of it as the difference between ordering off an à la carte [menu] versus an value-priced meal,” Steele says. The time frame is also different. Building any home from scratch, you have to find a site, secure permits and approvals, take down a house, and build, which may require as long as two years, says Courtney Pisarik, a sales associate and colleague of Maurice’s at Rodeo Realty. Add on the design process of a custom home, and your clients might decide they don’t have the time or interest.
Also, if your clients aren’t sure whether they want a gut rehab or a do-over, it’s important that you can help them identify the tipping point for when a remodel becomes a teardown. There’s no single checklist, but too many changes translate to a red flag. Watch out for a lack of “good bones” or structural soundness, design flaws (such as a basement with ceilings so low that it requires excavation to be usable), all new windows and mechanical systems, and a large addition, says Steve Sobkowiak, partner in Oakley Home Builders in Chicago. “It becomes too expensive to buy, redo, and compete” with newer homes, he says. Rosen’s firm uses a spreadsheet to compare costs of remodeling versus building anew. He finds that the average return on investment generally is higher for new versus remodeled, and brings with it less work and fewer unknowns regarding condition and costs.
Choose Your Role(s).
You don’t have to limit your involvement just to the transaction. Some real estate professionals earn an additional fee as a general contractor, possibly 5 to 10 percent of the total project cost, to help buyers avoid hassles in the building process, says Barry Jenkins, ABR, e-PRO, at Better Homes and Gardens Real Estate, The Native American Group, in Virginia Beach, Va. Rosen often connects builders and developers with buyers and stays involved through the building phase. He has an extensive picture library to help visually explain the construction process, material and building choices, and final results. Steele operates similarly through Steele Consulting. He receives an upfront project fee from spec builders for putting together a crew and overseeing management, typically from architectural design to construction and finishes, he says. In the last year, he’s helped with 40 or so homes and condos, mostly on Chicago’s South Side. Many buyers, especially first-timers, find it comforting to have their agent remain involved after they’ve bought a teardown since construction adds questions and different choices, as well as new work crews they’ve never dealt with before.
Some real estate pros play a more significant part by actually taking on the builder role. Jenkins typically builds one or two single-family homes a year through his company, Maplewood Custom Homes. Maurice, who has also built homes, is now completing one with a 1930s-style Spanish look, a style out of vogue of late in his market, but one he thinks will make a comeback as many tire of the plethora of hip, contemporary homes with open plans.
O’Brien, who operates a building business called O’Brien Signature Homes LLC, offers a timeless caveat for those who find the idea of building appealing: “Watch costs, since the market could change again.” Pisarik also recommends caution when donning this second hat. “It can prove a slippery slope if you’re acting as contractor or builder, because of all sorts of problems and conflicts. It also takes you away from your original job, unless you have the time and skills to do both,” she says.
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