Thanks for the most constructive response :-)
Now, to deal with some other responses and flesh out our reasons:
The plot is not particularly large - the floor area is roughly the same as the ground floor of our current 4/5 bedroom house and the garden is smaller.
The small cul-de-sac has nothing but bungalows on it (all the same design) - so planning for a new 2 storey property may be an issue.
The asking price is £220k (I am told that a building plot in the area is worth about £100k). There have been various suggestions about the cost of a demolish/build so I will assume at least £100k for a good quality 4 bedroom house with PROPER room sizes - not a modern estate build with no hall or landing and 8' * 6' 3rd and 4th bedrooms. I assume that this brand new property would then be worth between £350k and £400k judging by prices of upmarket detached houses in the area. There is, of course, the cost of storage of furniture and also accomodation during the demolish/build cycle. So we spend around £320K (but possibly more depending on size, quality of fittings etc., cost overruns) to get a good quality 4 bedroom house on a smaller plot than current, in a slightly less upmarket area, West facing garden instead of South facing garden. No sun lounge, no balcony, no view of the sea. Six to 18 months of hassle depending on the bugger factor.
So we could potentially make money - but wouldn't it be better to find a run down property at a much cheaper price? The demolish/build costs are the same but you aren't paying for an attractive and well maintained property. We like this bungalow and want to live in it. We would be paying a premium compared with a 3 bed semi with more accomodation, much more garden (they tend to come with 80' to 100' rear gardens) and much more potential for extension (2 storey extensions are generally more cost effective than single storey or loft conversions).
I didn't mention our reason for moving house. We are looking to downsize. So a strategy which involves a major work program to leave us with a similar house to our current one and no equity release is not top of our agenda :-)
The bungalow is 1930's - which means that it has a huge high loft with real wood beams and no cheap crap cross braced supports as found in most modern builds. So there is an obvious potential to make more of this loft area. The downside is the 2" * 4" joists. Other properties in this street have already had loft conversions (but no dormers).
There are 4 downstairs rooms (excluding kitchen/bathroom) which really makes it a 2 bedroom bungalow, although it is currently used as a 3 bedoom bungalow with a 16' lounge/diner. This would do us fine as a 'mature couple' but unfortunately we are currently infested with adult super-rugrats (in urban environments they can grow to 6' 2" or more) and need a minimum of 3 bedrooms until the poisoned bait (my cooking) or the lure of the great blue yonder clears some space for us.
So I am looking for ways in which a modest outlay (£25k or less) can expand the accomodation to cope with occasional peaks (Lord help us all if they ever breed) and still leave us with some cash to spend on ourselves.
We are looking at all properties within our budget and chosen area, but this is the nicest we can see currently (although a tad overpriced).
So - demolish/build is out. Extending backwards is a possibility - but to get as much floor area as convering the loft we would have to increase the size of the property by
50%-75% which would use up a lot of back garden and involve replacing the garage. Unlikely to cost less than a loft extension. Anything involving more than £25k is out unless we do it with the aim of a quick conversion, onward sale, and then look again for a long term home. Again, if we were looking for property to develop and sell on then we wouldn't be looking at this one!
Favourite option is to convert the loft at minimum cost, which means maximum DIY and minimum commercial tradespeople.
Which brings us back to the length of a piece of string.......
Cheers Dave R