1. The FEMA 50% Rule: Can You Rebuild?

A key factor to consider in the Tampa Bay area is the FEMA 50% Rule, which plays a significant role in determining whether or not you are allowed to rebuild. This rule applies to properties in FEMA-designated flood zones and mandates that if your home has been “substantially damaged” by a flood or hurricane, the costs of repairs cannot exceed 50% of the property’s pre-storm market value unless the entire structure is brought up to current floodplain standards.

• Substantial Damage Threshold: If repairs are estimated to exceed 50% of the property’s pre-flood value, the home will need to be rebuilt in compliance with updated flood zone regulations. This would mean elevating the home above the current base flood plan, which essentially renders the home as a tear down.
• FEMA and How It’s Measured: While the FEMA 50% rule is the same no matter where you are in the floodplain (flood zones: A, AE, AH, AO, A99, V, VE, V1, V30), the way each municipality enforces it can vary. For example, in the City of Tampa, you can get an independent appraisal and take 50% of that value, or go to the Hillsborough County Property Appraiser’s website and take 60% of the depreciated value of the structure. You would then take the total amount of square footage that needs to be remediated and multiply it by $64.65 (International Code Council’s predetermined cost per square foot for a remodel).

Example:

Depreciated Structure Value = $315,796

60% of $315,796 = $189,477.60

Reno space 2,000 sq ft x $64.65 = $129,300

Since $129,300 is under the maximum of $189,477.60, the property would qualify for the permit. However, it’s crucial to confirm with your local municipality how they measure FEMA rules, as these calculations can vary by location.

2. Financial Considerations: Rebuilding vs. New Construction

Costs will play a major role in your decision. Although repairs might seem cheaper initially, the long-term costs of bringing an older home up to modern standards could outweigh the benefits.

Deciding whether to rebuild or start from scratch with new construction can be a tough choice, and there’s no simple formula that applies to everyone. Each situation is unique, but here are a few key factors to consider:

• Land value
• Current “as-is” value
• After-repair value (ARV)
• New construction value
• Current and future interest rates, especially if refinancing is needed
• Rehab costs vs. new construction costs

Step 1 – Calculate the Cost to Build

Building costs vary significantly based on your tastes and budget. Currently, the minimum cost to build is roughly $155-$175 per square foot. While builders may offer lower prices, this is a realistic baseline for most “average-spec” homes. Many people end up paying well over $200 per square foot, and custom homes can easily double or triple that amount. For this example, let’s stick to the baseline.

Example:

A 3,000 sq ft home x $175 per sq ft = $525,000

Step 2 – Can You Qualify for a Loan?

Most people will need a loan to build. The key question here is how much equity you have in your property. Not all lenders offer new construction loans, so finding the right one is your first challenge. Typically, lenders want to see 20% equity, though some may accept as little as 5%. Keep in mind that lower equity usually means higher fees and interest rates.

Your debt-to-income ratio (DTI) will also play a role, as lenders want to ensure you can handle the additional costs of building a new home. It’s best to reach out to a lender early on to see what you qualify for, but for now, let’s assume you’ll be approved.

Step 3 – Does the Deal Work on Paper?

Next, you’ll need to estimate what your new construction home would be worth in your neighborhood. We can help you confirm this, but for the sake of this example, let’s assume the average new construction home in your area sells for around $1 million and is 3,000 sq ft.

Example:

3,000 sq ft home x $175 per sq ft = $525,000

Current mortgage = $175,000

Total cost = $700,000

Estimated value = $1 million

Estimated equity = $200,000 (or 20%)

This deal works on paper, assuming the lender is comfortable with your DTI increasing from a $175,000 loan to a $700,000 loan.

Step 4 – Does This Scenario Work for You?

New construction loans typically have slightly higher rates than standard 30-year fixed mortgages. Plus, in today’s market, you might be looking at a significant increase in your mortgage rate compared to what you locked in when you bought your current home. In this example, your loan would jump from $175,000 to over $700,000. While the bank may approve you for the loan, only you can decide if this is the right move for you and your family.