Tear Down Properties: Am I Missing Something?

[Nicholas Candaffio]

Hi BP,

I recently looked into a duplex deal in a C+ class neighborhood. The house had a major fire about 4 years ago and was not touched afterward. After being exposed to the Florida weather that long, there's nothing salvageable about the existing structure. I had talked to some people about the cost of tearing it down and rebuilding. I got quoted roughly $100/sqft ($160,000 to replace) and $10-$15k for the demolition. All that with cost to purchase the property would leave a total investment of $200,000. The problem is, other Duplexes in the area are being sold for less than half that.

My question is, how are people making money off situations like this? Is this just a quirk of my local market (Orlando) or is there something I'm not factoring in? Does new construction really appraise for that much more or are people just ok with putting in over market value so long as they're making positive cashflow? New Construction is low in my area, but it's not zero.

Thanks in advance.