What to do-Tear Down or Major Rehab?

[Tod R.]

I need to make a decision, so any advice is appreciated:

In 2006, my sister in law purchased for $130,000 a 2,400 sf home, 4 BR/2 Baths, built in 1965 on 1 acre in Southlake, Tx, great neighborhood one house away for an excellent elementary school. This was one of the holdouts when the neighborhood became developed.

This is pretty much where the good news ends. The home was in poor shape when she bought it, but thought she could tear down and build new home. With the economy crashing this didn't happen and the home has not been inhabited since the purchase. We maintain the exterior so it is not an eye sore. Here's what I think will need to be done:

Replace/repair roof-there are leaks into the home
Replace drywall-probably throughout most of the home
Replace ceiling-probably throughout most of the home
Replace flooring in most of home
Bring city water to house-Was on a well
Repair plumbing-I'm guessing age/lack of use
Update windows-old and probably not sealed
Mold remediation-Not confirmed yet, but most likely is present.
Paint exterior
Contengies x 10!

My delima is if she tears it down, I estimate about $20K, then her lender will call the note. I'm trying to determine if it is worth a major rehab. If she rehabs, she would probably rent. I'm sure it would get in excess of $1,000, just not sure of our market yet. I can run the economics once I get estimates, but I want to make sure I'm thinking this out correctly.

Any thoughts are much appreciated!