Tearing down a house is not that expensive. It depends a lot on local regulations. An excavating contractor can give you a bid...get three bids and their references.
There is a link to free, easy to use cost estimating software to determine the approximate cost to rebuild a new house.You will also find a short, fascinating "tear down" video a the end of the article.
A NOTE OF CAUTION!! Don't tear down a house that is financed and has a mortgage on it without getting written permission from the lender or paying off the loan first! It's illegal.
In today's market, the biggest reason for the small number of housing starts is simply because it is less expensive to buy an existing home than it is to build a new one. The land has not been depreciated but the building has. The cost to build has not gone done and in some cases has actually gone up (material and gas increases).
By tearing down the house and adding the cost of new construction to the "land value" you will probably be at a higher cost than an existing house in the neighborhood.
When you do tear down, please talk to "Re-UseIt & Habitat for Humanity" there could be many reusable items in the house from plumbing, electrical, wood products etc that they can use & the value of those items you can write off on your taxes as a charitable donation. It helps to bring down the actual costs of tearing down.
I have some inexpensive but very good contractor referrals if you'd like to talk to someone about your project. I also have a great architect I can refer to you.
Shoot me an email directly if you'd like to talk to me some more. I don't look back on this same Trulia thread for answers posted after mine.
Realtor Since 1996
Main Street Realtor