Buying a home just to bulldoze it makes little sense intuitively. Why would anyone do it?
The answer is crass, perhaps, but concise: Triple the size, triple the price.
Developers call it “the rule of three.” For a teardown or scrape project to be profitable, the new structure should sell for at least three times the price of the property it replaces.
“You’re not buying a home, you’re buying land,” said Paul Sobania, who has built several high-end homes in Denver’s Observatory Park neighborhood.
Suitable land is expensive, he said. That’s particularly true in areas where, ironically, prices have been driven up by successful scrape projects such as his own. Meanwhile, labor costs and copper and lumber prices keep rising. Construction loans carry interest rates of 8 percent to 9 percent.
Sobania built a 3,508-square-foot home on Josephine Street, replacing an aging carriage house that he purchased for $300,000. The new home sold for $945,000, a price ratio of 3.15-to-1.
Many older homes on sprawling lots in southeast Denver have made way for many new mini-mansions. Some are billed as “European style” and “Italian villa style.”
A newly built five-bedroom, 4,700-square-foot home on Monroe Street is listed for $1.425 million. That price is more than five times the cost of the previous property, which sold for $280,000 in 2005, according to county assessor records. Its lot size is 6,250 square feet.
Trend raises issues
The move to replace smaller, older homes with larger, costlier ones took hold in Denver in the late 1990s. A Community Planning and Development Office map of residential demolition permits issued from January 2006 through May 2007 suggests the most activity now is in east-central Denver, specifically the Cherry Creek and Hilltop neighborhoods, and in two corners of the city.
In the southeast, the most affected areas are Observatory Park and Eisenhower Park. Northwest, the hot neighborhoods are Sloan’s Lake, Berkeley and West Highlands.
Yet the teardown trend raises a raft of social issues. Critics say it disrupts neighborhoods and thwarts residential affordability. A 2002 study by the Washington- based National Trust for Historic Preservation was co-written by Jim Lindberg of the organization’s Denver office.
Older neighborhoods are often the target of scrape-and-rebuild developers with good reason, said Lindberg. Many were designed for pedestrian traffic, not cars. Washington Park, for example, grew up in the era of streetcar commuting.
“These areas have shopping districts, churches and parks within walking distance. They have great overall character with mature trees and landscaping,” said Lindberg.
The architecture, attractive for its consistency and historic character, is often displaced with designs that don’t fit in.
Negative impacts of that kind haven’t hit Denver’s Cory-Merrill neighborhood, says Dave Robinson, president of the area’s neighborhood association. Most residents are pleased about the effects of redevelopment on property values, he said. The area is zoned R1, a designation created mainly for detached single-family homes.
“We’re lucky,” said Robinson. “There’s almost no new development of retail, apartment buildings or even duplexes.”
Market punishes bad work
Ill-considered and poorly executed scrape jobs are evident around the city, admits builder Sobania. The market always punishes the bad ones upon resale, he says. As a result, such projects are in decline.
On the plus side, construction investment reflects rising demand in a neighborhood and often improves nearby property values.
Price ratios are one thing; profitability is another. Lindberg’s 2002 study painted a scenario in which a builder might buy a 1,350-square- foot home for $270,000, or $200 per square foot. It costs him $30,000 to demolish it and $400,000 to build a new 4,000-square foot home. He sells the new property for $800,000 (again $200 a foot) and pockets a $100,000 profit.
Those hypothetical figures are marginally relevant to builder Jim Cull, who is doing a scrape-and-rebuild project in the Berkeley area. Early this year, he bought a 602- square-foot home on Zenobia Street that he says was “uninhabitable.”
The purchase price was $186,000, according to county records. The cost was more than $300 per square foot, but that ratio was insignificant, he said. The value was in the land.
The tiny, aging home came apart easily, so demolition costs were relatively low, he said.
Rising now on the site is a two-story duplex with a total of 4,000 square feet of floor space.
Construction costs for such a project are typically around $110 per square foot, although they can go considerably higher, he said.
Applying that figure for construction costs, after accounting for the demolition and buyers’ real-estate commissions, his total expenditure would be around $665,000. Cull said he hopes to sell each of the two units for $440,000.
“That’s if everything goes right and the market holds up,” he said. “It is a risky game.”
