Considering a teardown - rebuild. What to look out for?

[Michael Wolffs]

I stumbled into an idea and wanted to bounce it off the community.  In the NYC metro suburbs, I found a number of houses in a fairly prestigious suburb, that are old, small, and for the overall  community and larger area, relatively cheap.  The community in question is known for good schools, so it would tend to attract families, who would need larger houses.  The houses in question are in the inner ring of the town.  As such they're walkable to amenities, the big one being the train station, with direct service to NYC.

I would think as a flip (by my definition, no building envelope expansion) the deal would be thin to negative (the interior of the one particular house I saw didn't look bad.)  But by adding square footage, bedrooms, and bathrooms, in a new construction building, a lot of value could be found.  To give rough numbers, the property is question is listed in the low 400's, and there are houses in the area that have gone well over a million (closed not asking.)

I've done a three family rehab to rental project. And that worked out reasonably well. But I've never done fully new construction in the single family market.  I haven't done a lot of due diligence yet.  The idea of this post is to get the parameters I'd need to look for.  I don't know what issues the town would give me in doing a teardown.  I'm also looking to use modern higher speed construction techniques to speed up the development process (think modular.)  I don't know if that would cause problem either.

What I'd like to know is are there rules of thumb for purchase vs sales price to look for?  What gotchas to look out for (I know there can be buckets full of town issues)?  And just in general, when a project like this makes sense, and when it doesn't.