How would you develop this property?

[David Faulkner]

I have a 2 BR, 2 BA, 1250 SF SFR, 7,000 SF lot in an A-class hood. My house is surrounded by 4+ BR, 2000+ SF homes. Market prices are ~$500/SF today. So, I'm thinking at some point in the future I may consider moving back in (it is currently a rental), pulling permits and developing out the property adding ~1000 SF as an "owner builder", and selling tax free after 2 years or renting it back out again. It is on an steep up-slope such that it is 2 stories in the front and 1 story in the back ... the 1st floor in the front has only the 2 car garage, ~100 SF unfinished basement, and concrete block retaining/structural walls with crawl space well before the back of the house. Stucco over stick framed construction. I was thinking I could perhaps dig out the basement to add footage. There is another residential street running behind the property, so I might also be able to relocate the garage to detached in the terraced backyard and turn the existing garage to living space. Either that or pop the top to add a 3rd story with insane city views, but then it might stick out (in a bad way) in this block of 2 story, 1920s spanish homes (mine is the newest on the block, 1952 traditional :-) ). This is not a designated historic district to my knowledge.

Would you build this home out under these conditions? How would you plan it? How would you design it? How would you build it? When? How big? What factors would you consider in this decision? I'm not looking for a GC or JV, just advice and opinions please.