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New construction to include existing structure,

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Asim's Forum Posts: 12

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By Asim in St Louis Park, MN on 3/29/2007

Good idea?

We just bought a 60 year old house on an acre lot. Our original plan was to tear it down and build a new house. But now we are thinking to build a new house while keeping the original structures and turn them into garages, workshop, home office, etc.

We are thinking this will add more square footage to the house without costing that much but here are my questions.

1. First of all, is it a good idea?

2. How would the construction lenders look at it? considering if we do go this route, we will spend money on the existing structure to renovate before going to the bank for a construction loan?

3. How would the house be classified? a new construction? addition?  (I hope not)

Thanks in advance for any kind of responses


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By Tom in Stroudsburg, PA on 4/3/2007

It would be considered new construction only if it is completely separated from the existing structure. You need to check your zoning on this. Some areas will only allow you to build a secondary building up to 50% of the original (or similar other provision). They may exempt this if you plan to tear down the older structure. The unfortunate part to all this is that when you apply for the construction loan you will probably not have enough equity because (assuming here) you financed the initial purchase as a house/land package. Now you have to go to the bank and they're going to devalue your investment.

For example: you borrowed $100,000 for land and house. you apply for a loan, say $200,000 to build your new house. They will twist things and say your initial purchase is only worth the value of the land, say $50,000. Now if you have $50,000 of your principal paid already that's good, but if not it gets worse. Lets say you have $50,000 in equity in the house. So that gives you $150,000 for the actual cost of construction and $50,000 to settle the balance of debt on the first loan.

Now the bank is still looking at numbers and the plans and the appraisal better say that you can build a $200,000 + home and you better be sure that you can build a $200,000 + home for a $150,000. Back to the equity you have in the property at present lets assume you only have $20,000 paid in on that $100,000 first mortgage, now there is an $80,000  difference that needs to be made up in construction savings or awe. They may give you some value for the old structure but it won't be the value of a house if its no longer able to be a house. Tha's if zoning doesn't require you to tear it down.

Since all of that is nothing more than hypothetical the answer to your underlying question is that you need to start with you local zoning and see what they will allow you to do. Then pick a set of prints thats easy to build but looks incredibly expensive.


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