What are your setback requirements?

Also, are you doing this for investment purposes or personal ones?
The house you live in is an entirely different kettle of fish than an real estate investment, so lets say for some reason you want to tear it down because you want a larger house, you don't want to move out of that neighborhood and you want to build something for your daughter to live in next door, it may be a reasonable decision circumstantially even if inoptimal financially.

If this is an investment, determine what your costs will be to proceed with your idea, then reconcile that against your other options available on the open market, buying/building houses in the same neighborhood or elsewhere. What you propose is expensive. It may be a better idea to use that money to just buy REOs, especially if this is an investment.

Also: It's not only zoning you have to worry about but any HOA covenants.

Sell first, then demolish.

So do you have the +/- $500K to build these houses outright, or will you need a construction loan?

If you are subbing/managing all the work yourself you can build a nice, mid-end custom home for around (+/-) $100 a sq. ft....that's if you are doing really well on the project/budget and obviously locations and finishes will vary this.

Since you seem to think you have $200K in equity, a bank will likely give you some money, but then you are still on the hook for $200K on your original loan, and need to come up with what I would ballpark to be $400-$500K in total construction costs (two 2,000+ sq ft homes). This doesn't factor in the potential problem that even if your financials are great, it might be a scale of slight pain in the ass to impossible in terms of your ability to get lending on a self construction project without having no prior experience or certifications. At the least you might need to take some certification classes or at the most potentially hire a pigeon builder to fill in this blank.

This puts your project all-in at around the $700K mark with lots of time, risk, holding costs, and not to mention the cost of living somewhere else during the 6-9 month construction window.

What are the comps on a price per sq. ft around you selling for on brand new construction?

On paper it looks like you have a pretty unattractive lot potential for this project but we need to know the setback requirements as well as what easements you are dealing with on the property.

I'd also really like to know the condition of your house since this is sounding a little crazy when you can potentially either add sq. footage to it, do some remodeling, potentially add a small guest house or garage apartment for income potential, or do all the above to it and either cash out and find a vacant lot or tear down project....or simply keep this property as an income producing property and leverage an equity line from this property into another RE project.

Why not just go find some vacant land to do this on? Wondering why you think your prime residence and this lot is good for tearing down a perfectly good home you are apparently living in?

It seems a mortgage contract should have some clause that you aren't allowed to tear down the house, doing so would defeat the whole purpose of collateral.

there is a reason there are not already 2 houses on that lot.

This implies that all opportunities ever available have already been taken.
In this case though I think I'd side with HighJaK and look into adding useful square footage, flip it and find a vacant lot or an actual teardown for a new build.

HighJak,

I'm not going to be doing this anytime soon or at all if it isn't going to produce a good ROI. Basically getting others opinions on if this would be profitable and worth doing, so I can plan on doing it down the line. Always enjoy listening to others with more knowledge and experience and BFI has plenty!

The condition of the house is dated. The exterior needs new siding and I wanted to change the decking to Treks. The downstairs/in-law could be completely renovated, but I have a buddy renting it out so it is serving its purpose. I put granite countertops in the kitchen/bathroom, but other than that the upstairs could also be renovated.

I know I bulldoze single houses and build duplexes. Have you considered building two duplexes?

What area of the country are you in?

Also what does a house currently sell for? multiply by 2 and see if it makes sense

My comment wasn't implying anything other than that lot was sized for a single-family home, not multiple homes.

Lozen,

I couldn't build a duplex in my area and I live north of Boston, Massachusetts.

Bode-ist,

Pretty sure another person in my town did something similar and they were allowed to have one house at 75ft frontage and the other at 100ft

Before anything, this is a zoning question.

You said "Boston" which means "Massachusetts" which means that there's a near 0% chance your zoning regs aren't micromanaged to the molecular level.

People have gone to court over parcels where the difference between being able to legally divide a beach lot into two buildable lots was a matter of mere inches and the competing courtroom testimony of each sides surveyor, millions on the line over inches. Zoning is a big deal.

Take your plat down to the planning/zoning department and ask them if it meets the requirements to be divided into two buildable lots. They'll be able to give you guidance. I'm guessing it's a bad financial decision, but it may be personally worthwhile.

I do this for a living, and here are my thoughts...

The first things to worry about are not frontage and setbacks (like everyone is mentioning above) -- if the numbers work, you can then move on to considering zoning variances. But, if the numbers don't work, there's no reason to spend days/weeks worrying about lot configuration and talking to planning/zoning people.

To see if the numbers work, you need to know:

1. What it costs to build in your area (your costs, not someone elses)
2. What new construction will sell for in your area

Using your example above, assume you can sell a new 2500 sf house for $850K. Further, assume that you can build for $100/sf. That means it would cost you about $250K each to build two houses.

You said you paid $400K for the land, or $200K for each parcel you'd be selling. So, your all-in costs for each house would be $200K for the land, $250K for the house and then assume another $100K (10-12% of sale price is about right) for commissions, fees, holding costs, loan costs, etc. That's $550K all-in cost.

If your all-in costs are $550K and you can sell for $850K, you're making $300K profit on each lot. That's $600K on the project.

Now, what I wrote above was based on three HUGE assumptions:

1. The value of the houses you were building
2. The cost to build them
3. Your fixed costs (commissions, fees, loan costs, etc)

Your goal should be to figure out the real numbers for those three things, and then do the same math I did above. Once you see your potential profit using the real numbers, you can decide if this is a project worth taking the next step on.

Assuming the numbers work, your next step is to determine if you can do what you want to do with the lot. This involves lots of stuff:

- Working with planning/zoning to determine if your frontages/setbacks currently support what you want to build. If not, is it realistic that you could get an administrative adjustment or variance?

- What is the water/sewer situation? If public, you're probably good. But, if you're on a well and/or septic, you have a lot more work to do. Does the lot support a second well/septic? Have you had a perc test?

- Then there are other environmental things -- are you in a floodplain? near any wetlands or conservation areas? any forestation issues? encroaching on any public use space?

- You'll need to think about roads, sidewalks, utilities and all the other things that you'll legally be required to do in order to get permission to build

What I would say is, if numbers appear to work, but you don't want to try to tackle all of this other stuff yourself, you should spend a couple thousand dollars and hire an engineering firm to help you out. They can do a basic analysis very quickly and then if things look promising, they would do a survey, site plans, etc., to determine the best configuration for the subdivision of the lots based on all the information above.

Once you have all that, you'll need to work with your planning/zoning department to do the subdivision -- this could take 4 weeks or 4 years, depending on your location, the complexity of your project and whether any neighbors want to try to stop you from doing it.

Once you get the subdivision approved, you'll get architectural drawings/elevations and start shopping around for a builder or sub-contractors (if you'll GC it yourself). Then you'll submit for permits, build the houses, sell them, and walk away with some nice cash if everything went smoothly...

AcesUp,

Thanks man, this sums everything up perfectly. I'm going to figure all the numbers out and then if it is going to be worth the time+$$ and people would be interested, I'll post pics/vids/updates on everything+the process.

Thanks everyone for the replies, help and suggestions.

The relevant figure for the cost/benefit analysis is the current market value of the property, not the $400K he paid back in 2009. Pretty elementary mistake for someone who allegedly does this for a living.

Yes, had I been performing a cost benefit analysis, it would have been a mistake. But, I'm quite certain that what I wrote had absolutely nothing whatsoever to do with cost benefit analysis.

And based on what you wrote, something tells me that finance isn't your strong suit (guess what, I allegedly have an MBA as well).

stfu idiot

Sell the house to be moved.

So you were just throwing out random numbers? I thought we're trying to figure out if this would be a good investment, in which case the $400k he paid is completely irrelevant.

choo choo

While I would generally assume that posts this ignorant are just trolls, I'll give you the benefit of the doubt as someone who just truly doesn't understand, and I'll try to explain myself like I would to a 10-year old...

First, I would have thought it went without saying (apparently not), but the two key investing measures that the OP should be considering on a project like this are: 1. Profitability and 2. Discounted cash flow rate of return (DCFROR, also known as internal rate of return -- IRR). For both of these measures, not only is the purchase price an important factor, without it, the analysis can't be performed.

From a profitability standpoint, the gross profit on an investment is the sales revenue minus the cost of goods sold (COGS). Purchase price is not only a component of COGS, but very often the largest component. Without purchase price, there is no COGS, and without COGS, there is no profitability analysis. The current market value (which you seem to care about) of the property plays absolutely no role in profitability analysis.

From a DCRR standpoint, all you care about are real inflows and outflows of capital. Let me repeat that with the appropriate emphasis -- ALL you care about are the REAL inflows and outflows of capital. Purchase price is a REAL outflow of capital, and as such, factors in to the DCRR. Current market value (which you seem to care about) is NOT a real inflow or outflow of capital and, as such, plays absolutely no role in IRR analysis.

Is that to say that there aren't useful ways to analyze the deal using current market value? Nope, I've never said that. But, given the information the OP provided and the opinions he requested, I see little value in those analyses.

Now, given that the two most basic, useful and appropriate measures of investment return for the OP's situation are profitability and IRR, would you like to explain how the purchase price is "completely irrelevant?"

Good work spewing a bunch of abbreviations they taught you in your mickey mouse MBA program, but you're still wrong. The 2009 purchase price is a sunk cost; it should have no impact on any decisions going forward.

I might be being too kind to your combatant, but the price you can sell for today (as is) is more important than your input cost.

I have no idea what you mean by "more important" in this context? Yes, the current market value is more important if you want to answer a different question than the one the OP asked. But, it wasn't more important to the specific question being asked (and that I was answering).

The OP said SPECIFICALLY he was interested in where to start, what the "total cost" of the project would be and what his "ROI" would be. I provided information on where to start and I provided a framework he could use to determine his all-in costs and ROI on the investment.

The OP never asked for a cost-benefit analysis (it would be impossible to provide one without information on an alternate exit strategy) and he never asked for alternatives to building new houses.

Had he asked what his best option with the houses was, THEN the current market value would play a part. As would LOTS of other things, including determining highest and best use, determining market rents, investigating possible rezoning, etc. But, the OP didn't ask what his best exit strategy was, and I wasn't answering that question.

A link to a Wikipedia article that has nothing to do with the answer to the questions the OP asked and nothing to do with the information I was providing...that's a powerful argument...

OP wanted to know if knocking down my house and putting up 2 houses would be a good idea, i.e. the total cost and potential ROI for that specific project, not the total ROI on his initial 2009 purchase. The calcuations which you gave for the latter are misleading and unhelpful, and most definitely not where OP should start.

OP clearly stated he was considering other alternatives such as renting the house out. Also what the hell did you mean by "if the numbers work" in your profitability calculations, if you weren't considering alternate exit strategies? That's the only way to know if the numbers work, by comparing it to your other exit strategies--the simplest estimate of which is (zomg!) current market value. But nope, you "see little value in those analyses". You prefer just lumping in the capital appreciation since 2009 with your rebuild calculations and hey what do you know, looks like you'll come out ahead!

Noob590....its real easy.

He is in the property for a certain amount from when he bought it (down payment + Mortgage currently owed).

There is a certain amount that it would cost to tear the structure down and build 2 houses on it.

There is a certain amount these 2 new structures could sell for.

This is a very easy real estate calculation OP can do on a napkin with a crayon to find out if it is an opportunity or not, he just needs to get the very simple numbers together. NO idea wtf you are on about or why you are over engineering this thing, but Aces is spot on.