Thoughtful Analysis & Measured Advice
Neighborhood revitalization is triggered by rising site values.
Over time, structure value declines while land value increases.
March 4, 2020
Site Value vs Structure Value: The Primary Metric for Project Evaluation
If you’re thinking about retrofitting, transforming, or replacing an existing home, the first thing to consider is not the design plan or finding a contractor. It’s the value of the site underneath the house. So, let’s talk about what’s happening to land in the Twin Cities metro, with Edina at the epicenter of the trend in revitalizing older neighborhoods.
Essentially an organic process, revitalization happens when the value of land outstrips the value of the houses or structures occupying it. The existing homes are fossils of their time, unable to accommodate today’s lifestyle dictates without serious alteration. They depreciate in value, while the land underneath appreciates.
The result of this inverse relationship—especially in settled, desirable neighborhoods that lack empty lots for new homes—is often a teardown when an inadequate house comes on the market. Homes that are the most unworthy, suffering from poor construction, deferred maintenance, and neglect, are culled first. As the process gains momentum, like-minded homeowners gravitate to the same neighborhood, a phenomenon called clustering. Increased demand leads to increased teardowns. Homes with more obvious structure value also succumb to the wrecking ball, and the inherent value of retaining the existing structure gets lost in the shuffle. Prices continue to rise, triggering affordability issues. Development moves to adjacent neighborhoods, at earlier phases of revitalization with lower costs, a process called flow.
Increased demand leads to clustering, then to flow.
Averages are compiled from 2019 MLS reported New Construction Sales in Edina, MN.
There are considerable differences in value and affordability between a teardown and a retrofit. Acquisition costs per square foot are similar but don’t show the value of the structure. A teardown zeroes out the structure value, while a retrofit makes best use of what is there, minimizing construction costs per square foot by 47.8%.
As revitalization flows through the community, the new baseline value of any home becomes its teardown cost, since by definition tearing down the house automatically zeroes out any retained structural value. This cost undergirds the economic value of other existing homes in the immediate area. The gap grows between the worth of the sites and the worth of the structures. The more prestigious the community, the sharper the division.
Site costs affect affordability, because they typically constitute 28-35% of the total budget for replacement. These economics drive pricing and have a significant effect on the resale market for existing homes. People often speak about owning a $500,000 home, but depending on the neighborhood, the reality is that they actually own a $450,000 site and a $50,000 home, because of neighboring revitalization. Therefore—with today’s replacement costs being so high and site costs averaging over $400,000—when you tear down the house, you easily end up building a new one that costs over $1 million. The average new home price in Edina is currently $1,360,000, well beyond the reach of many people seeking to enhance their lifestyle and improve their living conditions. The rising costs are, of course, continually aggravated by the accelerating price of labor, materials, and regulation.
Since one person’s teardown is another person’s “Heck, I’d live there,” this scenario triggers the quest for options that are less expensive, appealing to people who don’t need or want the price or size of new construction. Collectively, these homeowners create an evolving market for more affordable alternatives by choosing to work with existing structures. It’s important to keep in mind, however, that while utilizing the value of the retained structure may open the door to more economical revitalization solutions, not every existing home is a good candidate. Each home must be carefully assessed and qualified, not only in terms of upfront costs, but economic viability, price ceilings, and market feasibility to make sure the project is an appropriate fit for the budget and neighborhood parameters. While the theoretical cost per square foot is typically higher with retrofitting or transformation projects, if well-managed, the total cost will end up considerably lower, because of the retained structural value.
Our main point: When properly qualified, your home’s retained structural value can be creatively resourced to give you an economic advantage. Often overlooked or misapplied, this strategy minimizes the cost of renovation while leveraging the economic value of your core investment. And in passing—for homeowners concerned about environmental impact—this approach is also a wise way to minimize your carbon footprint. As the saying goes, waste not, want not.
MasterWerks is a knowledgeable, skillful partner when it comes to leveraging the retained structure value of your home. We do the hard research, at no charge to you, to make sure any upgrades enhance your lifestyle while avoiding investment loss. Shown above are examples of how leveraging structure value can work. And with MasterWerks guiding the process—see how economically advantageous it can be:
This architecturally designed and retrofitted home possesses the square footage and construction quality of much higher-priced new construction. Reprogramming the existing structure’s interior layout, finishes, and mechanicals enables the home to attain its full economic potential far in excess of the actual costs—a clear demonstration of the benefits of capturing and reusing structure value missed by the market.
Please note: Material and information contained in this Perspective are deemed reliable but intended only for general information purposes.
The presented data and recommendations must be independently verified prior to exclusive reliance thereon.