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?...