In my area, there is a lot of housing development going on where builders want to buy older homes and tear them down to build new and bigger homes. Often, homeowners are contacted by builders to sell their home directly to builders/developers. The potential cost savings are significant. It would be great if you could write about the pros and cons of doing this and the danger areas to look out for. This would be especially helpful to older readers who are likely to be contacted, since their homes are often in older and more desirable neighborhoods.
I’m a homeowner considering this option before downsizing. Thank you for considering this idea for your column.
Teardowns are an interesting phenomenon. While there are some older homes that could be renovated, today’s buyers want homes to look like the model homes they see at new home developments or the made-for-TV houses they watch being transformed on HGTV.
While it’s more expensive to tear down a house, building a higher-priced home in an established neighborhood with a good school district makes a lot of sense for developers. On a street near our home nearly all of the older (50-plus years old) houses on bigger lots have been bought by developers, and the new houses have gone up on those lots for three to four times the value of the prior homes.
Typically, the builder will pay one-third of the future purchase price for the land, spend one-third on building and marketing the house, and the final third will be profit. But typically builders will pay less than you might otherwise get if your home is in good shape. There’s a trade-off to be made in terms of spending money to get your home into the kind of shape where it will sell quickly.
Before you sell your home to a developer or builder, you have to understand what the value is as the house stands today (as a teardown or quasi-teardown). For that, it’s helpful to do a comparative marketing analysis. Ask three real estate agents (from three different firms) to come in and tell you the price at which they’d list your home. You should talk to the agents when they come to tour your home about whether it’s worth doing any renovations or improvements in order to sell your home faster and for more money.
The agents may tell you that because of the teardowns in your neighborhood, you won’t get that much money for your house unless you do a major renovation. And we don’t recommend that you undertake a major kitchen remodel or add a family room just to sell your home. The odds are you’ll spend more money than you’ll ever get out of the house sale and it will drive you crazy to try and manage that rebuild.
If the agents think your house is a perfect teardown, then you’ll want to understand what price point they think you can get for it. The next step is to look at what other teardowns have sold for in the last six months to a year.
Then, you can talk to the builders who have purchased the homes on your block. They’ll be most interested because they’re already building in your neighborhood and have resources there that can start on your house just as soon as they’re done with the house they’re working on. That’s most cost effective, so these builders should be the most motivated.
By understanding how much teardowns have sold for in your neighborhood, and how much older (but “done”) homes have sold for, you can make a calculation as to whether it’s worth fixing up your home to sell to someone who wants to live there versus selling to a developer who is going to tear it down.
You asked about the pitfalls or dangers of selling on your own. The big danger is you don’t know what your property is worth. That’s why we’ve suggested that you do your homework so that you can figure out which way you should go. Then if you decide to sell directly to a builder, you should hire a real estate attorney to help you draft the documents, make sure the closing goes as expected and that the money is used to first pay down any loans you have against the property with the remainder deposited into your account.
When you sell on your own, it’s a lot more work. The payoff is more cash in your pocket. Good luck.
Ilyce Glink is the creator of an 18-part webinar+ebook series called “The Intentional Investor: How to be wildly successful in real estate,” as well as the author of many books on real estate. She also hosts the “Real Estate Minute,” on her YouTube channel. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.