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In many cases, the value of the property will be determined on Land Value + Improvements. If you demolish, the land value will be $350k and the improvements would be the build cost of $350k. Some lenders will look at the value of the individual units using current comparibles in the...

By knocking down an existing house you actually devalue the existing property. Right now your property is worth $500k but after demolition it's only worth $350k. Doesn't appear to be a problem in this case, but can be if you buy at a high LVR and want to build straight away.