Housing market ‘desperation’ drives the rise of teardowns

But the rise of teardowns isn’t just because of old-fashioned bathrooms.

Not only does New Jersey have a lack of inventory, it also has a lack of vacant land. As of February, the number of homes for sale was down 13.7% from the previous year and the number of newly listed homes was down 28.5% over the same time period, according to Redfin, with only three months of supply. 

That lack of homes for sale coupled with few places to build leaves New Jersey move-up buyers, among others, with little choice but to knock down and start over. But don’t be fooled, buying a home to knock it down and build a new one in its place is not a simple process and it’s not necessarily a solution for a lack of affordability. 

“Desperation is becoming a bigger part of the marketplace right now,” Counts said. “I think a lot of [buyers], they’re kind of forced to do it if the stars don’t align…we’re dealing with some pretty severe housing demand needs and people are just getting creative.”

House flippers have always been around, but the rise of teardowns in New Jersey is happening at a much larger scale, and it’s becoming a more common practice in the market. Look no further than this would-be buyer, who recently tweeted that he’d been trying to upgrade his home in Central New Jersey for the last two years before finally deciding to knock down his “old house and build a new one.” 

Depending on the neighborhood, Counts says has seen potential buyers bid on homes with large upsides, particularly if the margins aren’t high enough for builders. There was a home in Scotch Plains, N.J. and the margin wasn’t there for a flipper, so Counts listed it for around $500,000, got an offer for $450,000. The buyer bulldozed it and built a home worth close to $2 million in its place. 

Counts was recently working with a couple who was hoping to sell their home in Mountainside, N.J. and buy a home in Atlantic Highlands, N.J., a beach community where they’d like to retire. They couldn’t find anything that covered all their bases and house prices kept going up. They were pushing their budget to find the “perfect house,” and they still weren’t getting “perfect,” Counts said. So they bought a house for around $420,000 in Atlantic Highlands, which was around $400,000 less than what they were seeing in that neighborhood. 

“They ripped it down to the foundation and basically put a new house up on it,” Counts told Fortune. “Everything is completely built [for] them.”

But they had to take zoning restrictions into consideration, do soil tests, percolation tests, and ended up going $30,000 above their budget. The couple had to hire structural engineers, architects, and a contractor, to say a few. They saved around $100,000 and the home’s valuation, once it’s completely finished and receives final approval, “will flirt with a million,” Counts said. They got everything they wanted but had to take the “scenic route,” Counts said, and it took financial capability. The couple mortgaged the house on a construction loan and paid the contractor a large amount, separately. 

With teardowns, GTG Custom Home Builders’ selections manager Isabella Giannattasio told Fortune, there’s several permits you have to get that go beyond what’s needed for an empty lot. For one, a demolition permit, which basically gives permission to take down the house.

So teardowns aren’t an option for everyone, Counts said, rather they’re a solution “available to a very small segment of the marketplace.” When asked how he’d describe that very small segment of buyers, he said affluent—or anyone who has large cash reserves. The process takes a lot of time and work, and “there’s a reason builders make the amount of money they do because, to be plain, the job is hard,” Counts said. 

Keller Williams Realty real estate agent, Adam D’Annunzio, told Fortune that in some areas of New Jersey, if you want to build new, the only way to do it is to find an older property to knock down. In New Jersey there’s a lot of flood zones and because of that the Federal Emergency Management Agency has made it so that you can’t improve a property that is below the current base flood elevation more than 50% of the structure’s value, D’Annunzio said. In that case, it’s typically more cost effective to “teardown to build new.” 

So from his perspective, it’s really about “being able to get into a location that you want to be in.” Although as previously mentioned, teardowns aren’t easy or cheap, and if there’s flexibility on location, it can be more cost effective to buy something already existing, D’Annunzio said. 

“You’re going to pay a premium price for all those things compared to somebody who does this for a living every day, who already has pre-negotiated rates with these vendors,” D’Annunzio told Fortune. “It’s going to cost you, on your own, a lot more money to build a house than it would a professional or a developer who does this every day.”

Interestingly enough, D’Annunzio and Giannattasio both mentioned seeing a trend emerge among teardowns, specifically in terms of multigenerational homes. In one case, D’Annunzio had a client who inherited property and was going to sell it and buy a different property, but they ended up tearing it down and rebuilding it. The client told D’Annunzio it cost them around $400,000 to rebuild and now it’s worth around $2 million. 

In a separate case, Giannattasio had a client who inherited property that had been in their family for a long time, but the house needed a lot of work and the client wanted something bigger. So they knocked down the home, used parts of the foundation, and built a new home. But there’s also the occasional CEO or entrepreneur that knows what they want and are “willing to spend more to get it,” Giannattasio said.