In the theoretical situation above, the glaring omission is the one that any developer would have spotted. What is the potential value of the finished house?
If you recently paid £400,000 for the house, regardless of its requirement to be improved, knocking it down eliminates any value in the house itself. Is the house still worth £400,000 as a building plot?
If you decided to spend £450,000 building the new house in its place, could it conceivably be worth £850,000+? It’s highly unlikely. You may consider the end value of the home an irrelevance, but you should always have an eye to the basic economics of the project – you never know what life may throw at you.
In many ways the local economics of the housing market will have the biggest influence on your decision, because the potential end value of the project is higher while, generally speaking, build costs are relatively consistent across the UK.
So in high value areas, it is usually easily possible to recover the additional costs of building a new house because the land values are so high; in low value areas, the difference in value between a poor quality house and a ‘good’ house are rarely enough to justify a complete rebuild.
Approach it with your head, rather than your heart, and consult estate agents to get their view.