Age-old question: New or remodel?

I have a 30's bungalow (2 BR, 1 bath, + finished/converted attic as 3rd master BR, full unfinished basement -- about 2,600 SF total) on a std 5K SF lot that I purchased some years ago. I owe about $80K on it, and a similar house four houses down sold three months ago for $530K.
The house needs complete remodeling, so I have been thinking over two options: Gut and redo inside existing shell/footprint, or demo and build new up to required setbacks, etc. (The existing roof and windows need replacing anyway.)
I've been told by local construction companies that building new after a demo runs about 1/2 the cost per SF as does a gut/redo. If that's the case, why would anyone opt for the "remodel" option for anything but the smallest jobs? In my case, the demo/new option has additional appeal because I could build with 10' ceilings and have an even better view from a "real" second story. And I'd also be able to pour the basement with more than its current 6' height!
I realize that the demo and new foundation will add to the cost, thereby offsetting at least some of the per-foot construction cost savings.
Anyway, I know this is a classic situation. But since this is a veritable fountain of experience and knowledge, I decided to write this up and see what you all have to say.
Thanks.
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available financing, personal preferences, etc. Before you decide on demo, triple-check the zoning thing yourself, don't trust contractor unless he can cite chapter and verse. I've seen people keep a couple walls of the original structure, just so they can call it a remodel and be grandfathered on stuff like setbacks (like you said), height, square footage, number of parking spaces (often a biggy in neighborhoods of your era), number of bathrooms, etc. Make sure there isn't a historic district to fight with- not all of them are high-profile.
Assuming none of the above applies, crunch the numbers. You owe 80k- how much do you have in it, how much would it sell for as-is, and how much would it sell for rehabbed, and how much replaced? Those are the numbers the mortgage people will be looking at. (ie, will the money they loan increase the value of the place the same amount the work costs?) If you go up a story, will it be in character with neighborhood? Around here, seeing a 1960s ranch plunked down on (I'm guessing) 2 lots in the middle of a bunch of 40-foot-lot 1930s bungalows isn't unusual, but it looks weird. (Infill, teardowns, fire replacements, who knows.)
Only you can decide if the hassle of a rehab or teardown is worth the money gained compared to selling out and buying something you like elsewhere. Which city in CA or New England are you from, anyway? Nobody likes to think about it, but it just may happen that the ultra-high real estate prices in those areas will drop back to only 3-4 times the national averages. Around here small-lot 1930s bunglows go from 20k in bad neighborhoods, to maybe 70k in nice ones. Be a damn shame to spend all that money, then end up upside down in five years. But that is just me, YMMV.
aem sends....
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Seems that more and more are opting to destroy and re-build. It has many advantages if that is allowed in your area and you can/want to meet all the new codes.
You need a place to live during that time so that cost must be factored in. Unless the house has particular styles, features, or historic value, I'd go for the tear down.
Find out for sure what new restrictions may apply. Get your approvals before you demolish. Can the house be build on the footprint you desire? Is there a height limitation? Is the lot large enough under new regulations? Ed
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- Someone -

- Nehmo - Demolish > Build new.
- Someone -

option for anything but the smallest jobs?
- Nehmo - It's a preservation mentality, or sentimentality. Sometimes it's stupidity.
--
*********************
* Nehmo Sergheyev *
  Click to see the full signature.
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If I still owed 80 thousand dollars on the place, I'll bet my mortgage holder wouldn't be thrilled at the notion of me clearing the lot.
In the 30's, the words Fibreglas and Styrofoam were unknown.
If it were my place, I'd sell it if I could get the mortgage paid off and a little extra, and I'd go to where houses don't cost a half million dollars.
I'm speaking to you from a three bedroom brick house with basement and 2 car garage that cost about a tenth of a half million.

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Even if the lot was worth $500,000 with nothing on it?

But there is the great unknown. We all know the axiom of location, location, location. If you build a new box on the lot for say, $100,000, it may be able to be sold for five or ten or twenty times that amount. The selling price for a shack is very high if it is a waterfront lot.
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As described, it is a residential area, with homes on a particualar age and probably style. There was really too little info from the OP. I'm betting that an infill house would have to be the same style as the others, and that would be a custom construction job. So my answer, with available info, is that demolition would be a very distant option to consider.
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