When does it make sense to level a house and build new?

[Donald Capwell]

Howdy, all!  I searched for an answer to this, but didn't find it... Please just give me a link if there's already a discussion about this that I missed!  This question is for anyone that is currently doing this sort of deal, or regularly considers this and has done this sort of deal... 

BACKGROUND - 

I worked for a man that once helped build a homeless shelter some years back (10-ish).  During the process, he questioned whether someone could build a new home (3/2), and make it available to people that are in need for around $50K ("affordable" was his goal).  So, to settle the matter, he actually set out to do it.  He bought some land and then built 3 identical houses, side by side, fully stocked with all appliances, weed wackers, rakes, brooms and lawn mowers, "turn key" homes, and then sold them for $50K each.  Net profit per house was $150.00.  In the end, he was satisfied that his logic was sound - it could be done (this is "yesterdays" money, and not to imply it could be done in today's economy) - but he also realized that you certainly can't make a business case to do this!  

With this story in mind, what is the business case YOU use to pull the trigger on building a home verses walking away, with the assumption that a house is beyond rehab. (NOTE: I do NOT mean that you will make MORE money to build new versus rehab - assume a rehab is not an option, and you have to buy on the basis of discounted land value, area's desirability and comps, or you it's not a deal). I have a property that I'm evaluating, and the existing house needs to be torn down and a new house built. No, I will not be doing this work myself, but if it makes sense, I'd like to work with the investor that does this so I can learn. Houses going up in the area are upper mid-range to luxury finish. Without getting caught in the weeds, at what point and using which method to evaluate (ie: Net Profit, ROI, Cash on Cash return, etc) does it make sense for YOU to level a property and start over? Would you do it for $50K? Not less than $100K? 150K? More? What makes sense for you to pull the trigger, and what questions SHOULD I be asking that I'm not?

Next, as a sidebar to anyone that may be doing this in Norther Virginia, what is your cost to build per square foot for a upper-mid grade (new construction)? I've been quoted several rates locally, from as low as $95/sf and up to $135/sf for upper mid-range to luxury grade builds. Let's hear from you VA home builders!

Thanks for taking the time to answer.