You might own a house that "needs a little TLC," as the real estate flier put it, but really it's more like one of those haunted houses you see in cartoons, shutters flapping in the wind.  You're trying to figure out if "love" means lavishing Bob Vila-level attention on those newel posts and reviving 92 year-old wallpaper.  Or does love come in the form of a wrecking ball and excavator?

The house where you reside (or an investment property) needs so much work that you cannot take half-measures.

 A good paint job, new flooring, and toilet replacement will not make things right.  It's either:  whole-house remodel (the kind where you have to move out) or a rip-it-down-and-build-it-new project.

Rebuild Wins Long-Term By Resetting the Clock

If you plan to be in the house for the long-term and then sell it, it is usually wiser to tear down and rebuild, at least from a purely financial perspective.  

Physical elements of a home are on a timer.  The minute the hammer strikes your house for the last time--whether remodel or rebuild--that timer starts ticking.  Exterior paint might last up to 7 years, but more like 5 years in inclement climates; dishwashers, less than 10 years; central A/Cs, 10 to 15 years; 3-tab composite shingles, about 20 years.

By rebuilding, you "reset the clock" in terms of the house's physical nature, everything from the appliances to the house's envelope (roofing, siding, etc.).  When it comes time to sell 15 years later, you're selling a 15 year-old house instead of one that is 40 years old.

 As a bonus, you got to live in a new house during those 15 years.  Buyers are attuned to the age of houses.  And if they aren't, their Realtor and house inspector will make them well aware of this fact.

Scaling Up, Scaling Down:  Controlling How Much You Spend

If you're tight on money, remodeling is always the way to go.  The issue is scalability--your ability to scale your spending up or down (or freeze it), according to your needs.

• Remodel:  When you remodel a home, you have control over your spending.  Remodeling is perfect for those who are hesitant or unwilling to make a big leap.  You can remodel a small bathroom, then stop when finances are tight.  Big tax refund?  Now it's time to fix that roof.  Money tight again?  Well, you can scale the roof purchase itself up or down, from a cheap composite shingle roof to a pricier standing-seam metal roof.  Money gets distributed in drips or in gushes, your choice.
• Tear Down/Rebuild:  This option is all or nothing.  After your first big purchase--the demolition--you're left with a vacant lot, committing you to building the new home.  Unless you want to be the owner of a vacant lot.

Do You Want Better or Cheaper? (But Not Both)

If you want better, tear down and rebuild.  If you want cheaper, remodel.  Even wide-ranging whole-house remodel will still be cheaper than tearing down and building anew.

Roger Greenwald, RA, AIA, says that most of the time

the cost of tearing down and rebuilding will be about 20% higher than engaging in an extensive whole-house remodel. But the architectural benefits of tearing down and working with a clean slate can be huge: Better fundamental architectural design, all new systems, clean circulation, high quality windows, new and efficient heating and cooling systems, tall ceilings, and space designed for your personal living patterns placed where you need it.

Remodel Wins By Giving You Neat Bells and Whistles

Proponents of tearing down/rebuilding stress the coolness of new houses, with their mobile device-controlled heating systems, radiant heat flooring, master suites, and dedicated home offices.

That argument holds water, as long as you have the additional money to spend.  Where that argument breaks down is that it fails to recognize that the house first has to get built.  With remodels, basic elements of the house are already in place and paid for.

So, the 20% extra cost for rebuilding mentioned above is what the remodeler gets to spend on flashy things.  Home movie theater, anyone?

Condition of the House:  How Bad Is Too Bad?

While all houses can be remodeled, not all houses should be.

Industry professionals generally agree that the following conditions merit a tear-down/rebuild, or at least swing the argument further in that direction:

• Desired improvements cannot be contained within the existing house footprint.  Thus, you want an addition.  The need for additional space is certainly not the only reason for building anew; additions get built all the time. The issue is that it happens in conjunction with extensive, expensive remodels of the existing house:  a double-whammy on your funding.
• Foundation is bad and requires a lot of work before the house can be remodeled.
• Ceilings are too low for your liking?  Because it's no simple matter to raise a ceiling--unless there is a mysterious plenum or empty space up there--the floor above must be removed and then rebuilt.

Community Restrictions

Finally, one influence on your decision comes from outside.

In years past, a homeowner was free to tear down and rebuild with relative impunity.  Any kind of building was always subject to zoning and permitting, but these influences were far more lenient than they are now.

Since the late 1990s, the tide has been turning toward recycling rather than throwing away, and this trend includes housing, too.  

Local building departments now cast a more critical eye on aspects of rebuilding such as size.  The word "McMansion" didn't even exist a couple of decades ago; now, it's bandied around all the time by city councils intent on preserving the character of cities through the preservation of its housing stock.

Even Los Angeles, traditionally the most "tear down and rebuild" area in the U.S., has begun to enact building moratoriums designed to limit the size of houses.  And because few rebuilds are content to remain within the same footprint as before, they are affected by these bans, as well.