Beware of one thing when dealing with a bank and doing a teardown - unless you make it very clear to the bank that you intend to tear the house down, they will end up being very concerned when it starts to come down. We recently had a situation where we bought a house and took out a mortgage for only about 50% of the bank-appraised value. We bought the house because it was a fixer-upper and we wanted to tear it down and rebuild. It was in very bad condition, and everyone else looking at it during the time we were making an offer on it felt the same way...there's no way someone could have lived in the house for long without fixing it up. We even told our mortgage contact at the bank that we were planning to tear it down and rebuild (with our own cash not a construction loan). He seemed supportive and commented many times on what a great lot it was and how nice it would be when the house was "done." So, it was clear to everyone involved that it was planned to be a teardown. Long story short(er!) - we bought the house in Sept, and in January, when we had our completed architectural drawings, structural drawings, had received building permits and were ready to start demolition, one of the final items on my list was to obtain "course of construction" insurance, which takes the place of homeowner's insurance when you are dealing with a construction/teardown project. In the process of signing the insurance documents, I noticed that the insurance company wanted to know if the bank should be listed as an additional payee in the case of a claim. I called the bank to ask if they're typically listed on a course of construction insurance, and after speaking with a few different representatives (none of who knew anything!), I was transferred to the office of the VP of Risk Management (or something like that)...anyway, someone on her staff almost had a fit when they heard that we were about to tear the house down. She kept saying that our house is the "bank's collateral" and not ours to do what we wanted with and that we could not proceed until we had the appropriate bank approvals, etc, etc. Keep in mind that we were not asking for the bank to pay for the construction, we are paying for the construction in cash, and we had an appraisal (done by the bank's OWN appraiser!) that was completed in September which showed the value of the entire property to be $1,100,000; they even broke this down between the lot value (approx $950,000) and the house value (approx $150,000). We have a mortgage for $500,000 so obviously, even in a worst case scenario, if the house was torn down and never rebuilt, the bank has FAR more collateral in the land than they ever had in the rickety old decrepit scary house!! Still, this person INSISTED that she had to go to some sort of approval committee and get approvals before we had a demo truck even enter the property. My husband and I were furious (although also somewhat bemused by this bizarre lack of logic and ridiculousness) and we spoke with several others at the bank who listened to our story and believed us when we told them that we had been very clear with the mortgage person during our loan approval process, telling him all the time that we were buying a "teardown"!! Our point was that, if there were further approvals necessary, he should have told us about them up front. Finally, we had a senior VP reluctantly agree with us but we are still being hounded by this VP of Risk Mgmt who is still insisting that we need to forward her a copy of our contract with our builder, our approved architectural/structural plans and all kinds of other info! At this point, we're ignoring her (because we have the approval of the senior VP), and construction has started, but this has been a big pain and total surprise. I'm telling you this long story because it just illustrates how crazy and upside-down the banks are these days and how their underwriting/loan approval processes have gone wildly from one end of the spectrum (super wide open) to the other (absurdly tight). My husband and I are the perfect clients for them - we have stellar FICO scores, have a longstanding history of repaying all our prior mortgages (two of which were with them), and MOST importantly, the bank has MORE than enough collateral in our current property to cover it all even if we never paid another dime!! So, I'm sorry to say it, but like others have basically said, I would be surprised if you get a construction loan with your current situation, and IF you decided to and could somehow do it on a line of credit or home equity situation, BEWARE that the bank will have a fit if/when they find out that you're tearing your house (otherwise known as the bank's collateral) down. Sorry, I don't mean to be a bummer about all this but it's best to go into it with eyes wide open and know the current lending/housing environment. Whatever you do, best of luck!!

weed30, this is exactly what we did! We still had an existing mortgage on the old property, but even torn down, the land our old house was on was worth more than our outstanding mortgage. Our bank was AWESOME working with us on our construction mortgage and we are only a couple weeks out from being done. Basically, what was involved was opening a line of credit and getting an initial appraisal (the bank does this). Then we got pre-approved for the new mortgage, and the old mortgage is rolled over into the new one. We used our line of credit to pay sub-trades (my DH was GC) and the appraiser comes out at 4 separate stages during your build. He assesses your completion rate and the bank forwards however much money that represents from your total approved mortgage to your Trustee. You then pay off the line of credit, usually with some left over, and you start over again until the next appraisal period. It's been a very easy process, so I hope you go for it! Lora

"One of the model homes" In my area, model homes are for tract builders. Tract builders have different economies than single lot builders. There are exceptions to this model but generally it is true. It isn't that teardown, permits etc cost that much (in my area), it is just that you are building on a single lot. There is also the reality that the single lot may have rules that developers don't have that add to cost. As someone who has done both, I will share some costs. We bought a $400k tear down that was 1800 sqft brick 2 story with carport. It cost $12k to teardown and haul away. We had to spend about $5k for some tree removal. The utility hook ups are inexpensive since they are already there - an empty lot is significantly more. Permitting is $3k which is inexpensive - what isn't is that it has taken 6 months and we still don't have permits. Surveys can be $5k - we have to modify lots when we tear down because the rules have changed so much since they were platted. There is water mitigation that can cost $15k for engineering and execution. Developments don't cost much more for the entire development. And then lastly, we expect $180 a sqft for the actual build. Spec houses in our neighborhood are about $1.2M for similar lots, 4500 sqft. We will build a little smaller but that doesn't help on costs that much. This is in Raleigh, an area with (usually) significantly lower costs than NoVa. No one in my area builds a "model home" on a single lot for $300-$400k at 3000 sqft. That being said, there are ways of getting cheaper homes built - ie modular - but that may not be an option depending on the jurisdiction.

We bought a completed tear down and rebuild. Ours had not been replaced. Sewer was in good shape after it was televised. Didn't realize we had a lead waterline until they redid our street. The line into the house was copper. We had to pay $$$ to get a new waterline. Not to mention the worry of lead in our water for the 5 years we lived there. Best to investigate and determine the condition to make the best decision.