Who can afford a teardown home these days?

Who can afford a teardown home these days?

On my way to work each morning, it’s not hard to find new homes under construction.

The interesting thing about some of these new home builds, there was already a home in that location to begin with.  Welcome to the world of teardown homes.

Here is an example, in the Alta Vista neighbourhood of Ottawa:

Teardown home

Homes in this area, depending on the building condition of course, can sell from anywhere between $500,000 – $800,000.

Some of these established homes were lived in for many years; they were not necessarily all dilapidated and in need of major repairs – although I can only say that from a drive by perspective.

This makes me wonder (when I see a new home being constructed on the same lot as the previous home):  who can afford a teardown these days?

I can only assume these folks have some deep pockets and some level of irrational thinking:

  • They need to purchase said home on lot to demolish. Say $500,000 – $600,000.
  • They need to demolish said home and rebuild. Say $200-$300 per square foot in Ottawa.  This new home in my picture seems to be 2,000+ square feet so at the low-end that’s a $400,000 expense.
  • They need to live somewhere while new home is being constructed. Let’s put those operational costs at minimum > $12,000 per year assuming the homeowner is debt-free (i.e., assume city of Ottawa taxes are $6,000; assume heat, hydro, water, telcos cost another $500 per month or $6,000 per year; this does not include any other house maintenance or operational costs).

My numbers above are conservative.  All told, in this area of Ottawa, you’re looking at more than $1 million for your tear and and re-build investment.

It seems irrational until you consider one thing – in urban centers the demand for land is soaring.  To paraphrase Mark Twain on real estate investing:  buy land, they ain’t making any more of it.

There seems to be a growing trend to move away from rural areas and suburbia in general, to go back to the city, something my wife and I are strongly considering here and here.  This makes city of Ottawa property in my Alta Vista example rather valuable now and potentially far more valuable in the future.  This could result in a perfectly rational decision in another 10 or 20 years.

Potentially the question some folks might be asking themselves is something different than what I proposed above.  How can I not afford to go ahead with a teardown home?

What are your thoughts on the teardown phenomena?  Good decision based on location?  Bad decision in general?

Mark Seed is the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've grown our portfolio from $100,000 to well over $500,000. Our next big goal is to own a $1 million investment portfolio for an early retirement. Come follow my saving and investing journey by subscribing to my site. Delivered by Subscribe Here to My Own Advisor

36 Responses to "Who can afford a teardown home these days?"

  1. This is a pretty complex issue in that one has to take a LOT of things into consideration.

    As a starter, I’d not be betting on the housing market, as we know it now, for a 10-20 year time frame myself. Just taking into consideration age, us Boomers are going to be unloading a substantial number of properties somewhere in there. Are we going to re-buy after selling our larger homes and if so, what size and where? Would we rather lease? I don’t have a clue and I suspect many people much smarter than I don’t either.

    As to buying tear-downs. I’ve noticed a few and it seems to be a few guys who run some kind of construction business. I’d be concerned with what they put into the build and the quality of workmanship behind any shiny facade they put over top of it.

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    1. re: I’d be concerned with what they put into the build and the quality of workmanship behind any shiny facade they put over top of it.
      Twice a day I walked past a recent new build during the entire construction — from foundation to front lawn — and it was solid work; the bones at least, I had no access to the interior finishing work. That said, I have been in new builds which just screamed “CUT CORNERS!”…so, like every other consumer good — buyer beware.

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    2. Well, it will be interesting if we move in a couple of years, what we can sell our house for. I am optimistic we can get a good price but nothing is guaranteed.

      As for the building quality I agree. I suspect lots of folks are flipping houses trying to make a buck.

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  2. There’s a house in my neighbourhood that’s selling for $1.1M and it’s a complete teardown. I don’t understand how people are buying these as investments.

    In Vancouver area (we live in suburb of Vancouver), there are multi-million houses being sold then torn down so developers can build townhouses/condos. The market is insane.

    Interesting that the same thing is happening in Ottawa but at a lower price range I guess.

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  3. Depends on the local housing market.

    As Tawcan mentioned, the markets here in the West Coast are ridiculous. As in the OP, the final build will almost always be $1MM+. It’s not any of the “middle class” constructing these, it’s the wealthy. Would be interesting to see the residential real estate stats on which financial demographic owns what.

    In my immediate neighbourhood, the trend has been to subdivide corner lots and build another house. With all available corner lots now subdivided, the tear down phase has just begun. In conjunction, the new builds almost always have secondary suits built into them. Says something right there when a house now requires two households to pay for it.

    The tear down trend in Calgary bottomed out a few years ago because of lack of available/viable lots. It’s still going strong in Vancouver. Another popular option here (Victoria) is to raise the house & build a suite instead of an entire new build; the cost is ~$200,000+. But that’s still going to take at least 10 years of being a landlord to recoup those costs.

    One positive is that these builds often add to the (affordable?) housing stock. In a city with an almost 0% vacancy rate (the lowest in Canada), more housing is always a good thing.

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  4. My section of Hamilton has all half acre lots and is undergoing an influx of Toronto residents who want a home on a large lot for the same price as a 600 sq ft condo in TO. My next door neighbour is an agent and tells me 1 in 4 sales are from Torontonians. On my own street my 600,000 home looks across at two homes that were bought, tore down and a new bigger home with a total price tag of 1.6 & 1.85 million in it’s place.

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  5. I worked for a developer in Kelowna…one project…tear down 2 homes with nice lots and build 52 townhomes. That’s the type of municipal tax pop that gets approved at City Hall. Balancing the need for more housing with the 3P’s that higher density brings..Parking, Pets, Parties. I would not live there.

    The small town I now live in, lot’s of properties are getting infill houses, in fact, a family member recently bought a property for $300K, has a rental house to pay the bills for now and a large enough lot to sever off and build a new retirement house once they sell their GTA property.

    As to the quality of teardown houses, from what I’ve seen, would put most into the minimum-building-code builders. Some are custom builds…like buying a car…get what you pay for.

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  6. A quick observation from Highland Avenue in Ottawa: 50 by 100 foot lots have escalated in price over the last 5 years from $500,000 to about $650,000 +. All these lots had livable, well maintained homes, all have been torn down. The replacement build quality from casual observations appear to have been excellent. The buyers have not cut corners. Unfortunately my own home, largely original, build in 1946 has been swept up in a rising tide of evaluations and municipal taxes. While this may increase my eventual estate, with no interest in selling it only diminishes my retirement cash flow. Truth be told, I also preferred many of the previous owners
    ,

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    1. You’ve been riding a wave Robere…good on you. Right home in right location in the right market.

      It will be interesting to see how Ottawa evolves over time. I can only assume in a ‘government town’ that house prices will continue to inch higher and higher over time, especially those in my picture in the city. Never assume as they say!

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  7. In Toronto, I came across a man, who runs such a business. His company will go and buy houses, in the range of half to one million bucks. Then demolish and build according to the lot size . If it is an old big house in a big lot, they make more than one house with smaller rooms and both will go over a million dollars. What you are seeing is a construction business. That is not a single person buying and flipping the house. It is a group activity. There might be legal loopholes involved too. We all know that profit from selling your primary home is not taxed. I don’t know the details

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    1. re: We all know that profit from selling your primary home is not taxed.

      There was a man who did just that on the block next to me for that very reason. I think he did 5 or 6 flips. He would buy the house and live in it for a year whilst renovating it (no tear downs; always adding a rental suite). After the year was up, and the house was deemed to be his primary residence, he would sell it. He’s made well over $500,000 tax free.

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    2. I could certainly see loopholes in this business – but it seems in Ottawa (for the most part) they are not severing the lots. At least in my example they are not. The owners demolish something that costs $500k to build something that costs $500k in another year or so.

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  8. At some point in time each of theses million dollar plus homes will have to sold. Where will the new buyers come from and how much will you want $2.500,000 maybe more maybe less. It will be interesting to watch how todays kids will be able to afford a house.
    I am thinking a correction will come US style maybe , perhaps worse, maybe a little gentler but be aware.

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    1. It will be interesting to watch how todays kids will be able to afford a house.

      Ummm…it’s called TBoM&D

      AKA The Bank of Mom and Dad + CMHC.
      It was only recently that CMHC stopped insuring houses > $1M. for the life of me…..can’t imagine buying a $1M house with $50K down, TBoM&D tapped to pay transfer and closing costs etc. first minor correction…even…major correction…way underwater but the debt didn’t change.
      greaterfool.ca has numerous stories about house horny millenniums….none end well

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      1. I can’t imagine buying a $1M house with $50K down either. I freaked out when we bought our current house and our mortgage was over $300k. I wondered what the hell was I thinking? We’ve never had the bank of M&D to rely on. That will never happen. My parents helped me through uni – that was plenty and I’m grateful for it.

        The “horny millenniums” comment made me laugh 🙂

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    2. It will be interesting to see how millennials and other generations can afford a home – most of them won’t but then again they’ll be a glut of homes on the market in another 10 years. That’s my prediction. Demographics will force that shift. People in their 80s and 90s can’t always stay in their primary home – as much as they would like to.

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  9. By living in small town Manitoba, I think the most expensive house I’ve seen on the market (new) is around $500k. I can’t believe people are paying $1M to live in a house. Seems unfathomable to me. I just roll my eyes and thank goodness I like living in a small town away from the insanity. Why do millions of people want to pay millions of $$ to live on top of each other? I’ll never understand the hype.

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  10. I live in the east end of Alta Vista in a modest 3 bed bungalow. My wife would like to buy something bigger. Prof Ian Lee at Carleton is a big proponent of owning has much house as you can afford. A tear-down as you’ve described is out of the question. With only 6 years left on our mortgage, I’m not keen to borrow $ that will take me another 20 years to pay off. My wife would like to sell an investment property where we have about 200k in equity to get her bigger house but I like the diversity our other property provides (in GTA). What I have pitched to my wife is we find something with income potential, and can be payed off within 10 years. This way we would still have plenty of equity to take advantage of the next correction in the stock market. love your blogposts!

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    1. Good to hear from you Alan. I think your income property makes sense. If you have diversification in RE, principal residence + income property + other assets – that’s good. Anything that can be payed off in 10 years is good investment – as long as that property appreciates in value. Any debt that takes decades to pay off, that may or may not appreciate in value is bad investment IMO.

      The market correction is coming – but when and how big – I wish I knew 🙂

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  11. In my neighbourhood, in Markham Ontario, I see the same phenomenon. From what I have observed, the people that bought the tear down seems to seek for big lots with lots of yard spaces. Once he home is built, a million dollar tear down turned into a multimillion dollar property. Right now, The newly built subdivisions won’t have the yard space of these tear down.

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  12. We bought a teardown in 2008. The main reason was location. We kept encountering nice houses in ok location/lot or a great lot with terrible house. We opted for terrible house on our perfect lot/location. We couldn’t justify paying for an ok house that we’d tear down – that would be wasted money. So we took our time – there were always new listings coming up (although emotionally it always seemed like now or never) and the longer we waited the more money we had saved. We rented out the tear down (already had tenants) while we saved further for the build. When they eventually moved out in 2009, we lived in the tear down while we built on the same lot (acerage). A plus was that we could have a close eye on construction and weren’t paying for two housing locations at the same time. It took 9 months for permits and a year to build. A minus was that the teardown house almost fell down around us as we built. We were fortunate to do this at a favourable part of the housing market cycle. I wouldn’t do it now at this stage of the real estate cycle. Plus my wife would never want to relive living in a teardown again – the place had a creepy dirt basement where a husband could easily “disappear”.

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    1. Thanks for sharing your story Loonie. It certainly seems location, location, location has a great deal to do with the trend. Interesting process, and that you wouldn’t do it again at this stage of the RE cycle.

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  13. Have to also consider the ongoing cost of property taxes. A tear down/new build might could be assessed at well over $1MM which could cost $6-8,000/yr in property taxes. That’s nearly 10% of the average household net income. Then again, as I previously guessed, it’s not the average household engaging in this practice.

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  14. I think it is a huge risk. Seems like Canada is going through a housing boom like the US in the mid 2000s. Tear down or otherwise, there are folks who put a million dollars into their housing purchases back in 2006-2007 in the Chicago metro area. Market values in many cases do not allow these folks to sell and break even today. I think it’s only smart if 1) you got money to blow or 2) it truly is the dream home and location you will spend and enjoy the rest of your life in. If one considers it an investment, I think it is a speculative one. Who knows where people will want to live in 10 years? Tom

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    1. I totally agree with you Tom. You have articulated the underlying reasons behind my comment about not doing it again at this point in the RE cycle. Even as an “investment”, primary residence real estate should only be one plank. It has favourable tax treatment and has done well recently, but can get illiquid fast, and does not produce cashflow. The Canadian herd has been moving in the opposite direction for a long time now concentrating their “portfolio” in a single asset strategy. I think we are in the final acts of the housing boom here too. People are so emotionally invested in housing that I am careful about expressing my opinion and there is still a strong recency bias. I am also not a great market timer, so am just going with diversification as my strategy. My house is about 1/4 of my portfolio and shrinking. What happens here may not replicate the US crash exactly, but I suspect it may rhyme.

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    2. Very true Tom. We’re going through the same speculation/decisions right now. i.e., where do we want to live in the next 10 years? I always thought we’d live in our current home but things change.

      Reply

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