custom home- land at historical cost versus fair market value

[Account Closed]

I am evaluating a prospective build of a custom home.

My wife and I purchased a tear-down for a rather deep discount to the market value. It was an REO and both the bank and listing agent understated the GLA by around 200 square feet. At prices of $200/sq. foot in my area for these small homes (new construction nears $300/sq. foot) I can't help but wonder how $40,000 of value appeared out of thin air ($200/foot X 200 feet). In addition to the extra square footage, it was purchased for a discount of about $10,000. In total we have a home that we could net $50,000tomorrow if we sold (excluding transaction costs).

Construction Costs (150/sq. foot): 3,000 sq. foot home- $450,000

Land costs: Historical- $300,000; Fair Value- $350,000

Total cost- ?????

Tearing the house down effectively eliminates my new found $50k in equity. Even though it’s only on paper, doesn’t tearing the house down represent an opportunity cost of not selling and finding another lot (in the amount of $50,000)?

How should I be thinking about my land costs given the scenario?