House Of Shards

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Two years ago, Marc and Karen Frankel paid $850,000 for a two-bedroom, two-bath ranch-style home in Tenafly, N.J.--and knocked it to the ground. In the process, they joined a swelling group of ambitious homeowners who, faced with a superhot real estate market, have concluded that the only way to get just the house they want in just the neighborhood they want is to demolish an existing home and build one from scratch. The National Association of Home Builders estimates that some 50,000 teardowns take place each year.

But does it really make financial sense to destroy one house to build another? In recent years, as the price of residential real estate has rocketed, the answer has often been yes. Today, with the boom losing steam, a teardown is no sure thing. Still, it can prove worthwhile — as long as you're careful. As Peter Miller of explains, you need to crunch the numbers to make sure the value of your new home will at least match your purchase, teardown and rebuild costs — plus leave you some compensation: "A typical profit margin should be on the order of 10 to 20 percent."

Of course, there are other complications with a teardown. You should talk to the local zoning administrator or planning commissioner to see whether there are any restrictions on new construction. It can also be wise to meet with local preservationists. And in the end, make sure that money is not your only motivation. Says Columbia University real estate professor Christopher Mayer: "Look at it as, 'Am I really going to like what I'm building?' Most of the return from the house will ultimately come from living in it."

As for the Frankels, it seems that their adventure in homebuilding is paying off. On their plot now stands the frame for a majestic 8,000-sq.-ft. Mediterranean. Although they are pouring $1.5 million into construction, when the place is completed early next year, they estimate that it will be worth more than double that amount.

Epperson is CNBC's personal-finance reporter