How do companies and homeowners determine when to tear down a home?

Hello, friends!

I'm hoping more informed folks can explain this a bit, but how do folks determine when to tear down a home and build a new one? I get that the answer is situational to some degree, e.g., a smaller home for a bigger one, and that the decision depends on many variables.

I started thinking about this when I saw on my neighborhood listserv that a duplex is being torn down. From my outsider/neighbor perspective, the existing structure looks like a perfectly fine building that just might need some love. So, my curiosity as to the (possible) logic behind the decision to tear down a seemingly adequate structure in a popular residential area has led me here.

An obvious answer is of course the potential justification to charge more rent due to newer amenities and increased density, but could there be more to it? When do maintenance costs justify a complete teardown? Are teardowns less expensive than I assume?

I'd love to hear more about these things if you have thoughts and knowledge to share!

I think there are a few scenarios.

1. The land is so desirable that someone will pay whatever it costs to build what they want, where they want, regardless of the economics involved. I can think of a few examples of this -- the house at 707 Watts St. was bought by a couple for $925k, who proceeded to tear it down and build a new house there that likely cost $2+ million to construct. They essentially discarded a half million dollars in the process by demolishing a historic home that was in great condition. Trinity Park has become so desirable that they were willing to do this.

2. For investors, there are a few other factors. Sometimes, structures simply don't have good bones, and it's easier for a developer to come in and start fresh if they don't see the value in what's currently there. Other times, there are good bones, but a developer is just after a greater profit than what they think the existing structure can support. For the house that was flipped at 140 S Driver, a developer bought it at 160k. It needed a complete gut reno, and they also expanded the square-footage with an addition. They ended up selling it for 380k, which I imagine (completely uneducated guess here) netted them 100k in profit. If they'd instead demolished the house, spent 400k building a new bigger one, and put the new property back on the market for 800k, they could've doubled their profit, with much less risk (what's waiting for them inside those historic walls? Asbestos? lead paint? Structural problems?).

And finally, zoning/density plays a role. The house at the corner of Gregson and W Club was in great condition. I recall it selling for over 500k. A developer bought it, tore it down, and is now building 7 homes on the property, which is right across from the future North Gate redevelopment. If each of those homes sells in the range of 5-700k, just look at what kind of profit the developer will see. This scenario to me, despite being driven by profit, is a net positive in most cases (but needs to be weighed against the loss of history). We get more density, and we increase the housing stock in areas where lots of people want to live. Ideally, we'd get affordable housing in some of these scenarios, but unfortunately that rarely happens. It's much more unfortunate where the opposite scenario occurs and someone tears down a duplex to build a single family home. It seems like this is what's happening in the scenario I think you're referring to -- 9th street? It's one of the most desirable areas in the city -- extremely walkable to many businesses, and $310k was honestly severely underpriced for that area. I am not sure if it's a buyer planning to build their own dream home in their dream location or an investor looking to turn a profit in an area that can support a high price.

That house at the corner of Club and Gregson sold for $620k I think it was. Surprised and disappointed to see that it was being torn down. Obviously the density is a plus but that was a pretty little house.

Yes,  it was pretty but certainly not certainly wasn't an historic home. And now there are 7 homes where there was one. Honestly, lots are way too big in Durham. Doing a teardown is the only way more people will be able to live in a downtown walkable neighborhood.

Per the original question, a teardown is optimal when the costs exceeds the benefit. So, if the value of the next best use value (what you would build if the lot was vacant - minus the teardown cost - minus construction costs > expected net present value of the existing structure , a teardown is optimal.  Of course, this abstracts from a lot of things like financing costs etc.

So to your question, if maintenance costs are high, this would lower the net present value of the existing structure, making a teardown more likely.  

One implication is what we build tomorrow matters for the future. If we build a bunch of 5 story apt buildings downtown, which is optimal now, we probably won't tear them down and build a new structure for a long time. This is true even if durham grows a lot and really the apt buildings should be 8 stories, you don't tear them down until the value is high enough to justify it because the 5 story apt building is still earning money, not the max amount of rent, but some.

A second implication is that as land prices get more expensive, building up to economize on land make more sense.

In sum, unfortunately it is probably getting torn down because the  lot is more desirable as a single family plot (unfortunately).

The four detached houses at that site on the corner of Gregson and Club were recently listed for $525k at 1200 sq feet ($437/square foot). God bless whoever buys those places with zero outdoor space, yard, anything.

I mean, that's right in line for the neighborhood. Other houses on neighboring blocks have sold for over $500/sf, and they're older construction. These seem to be marketed toward people who would consider a townhome or condo but would rather not have to share walls.

Exactly right.