Is it a good financial decision to tear-down and rebuild?

Here's the situation I'm in with my primary residence by the numbers:

  • Old house with acreage, valued at $550k but likely extensive repairs in the $50k range just to sell. This is the Zillow estimate however and is probably grossly overstated. The home is extremely old and not in good repair. It would not pass inspection in several areas.
  • Full remodel would be at least $150k by rough estimate with a lot of unknowns.
  • Property alone, without the house appraised at $400k
  • Current mortgage balance $220k at 3.5%

Speaking to a builder, here is what I am facing for a full demolition and rebuild:

  • Demolition $50k (this includes a septic and well overhaul)
  • Construction $550k
  • New mortgage projection: $820k at 6.5%
  • Appraised value with new house: $920k

By the rough numbers alone, here is what I see roughly in equity difference:

  • Sell with only necessary repairs: $230k at best after repairs and realtor fees. More likely 150k or less considering the condition of the house. Whoever buys will likely have the same decision to do extensive remodel or demo.
  • Remodel will likely only bring the home to the Zillow estimated value, so call it $130k in equity.
  • Rebuild: 100k in equity. Assuming the project does not go over-budget.

Financially, it seems to be a wash. What would you be inclined to do in this case? Sell and buy elsewhere, remodel, or demo/build? Some other aspects I'm considering is this land is by far more established than I can find available anywhere in the area. Outbuildings, fully irrigated, established trees. Convenient location. Even if I sell and buy a different property, I will be looking at the same mortgage for something comparable, and the payment will be comfortably within my budget either way.

I am leaning heavily toward demo/rebuild since I do like the land, and it seems to be the route with (relatively) less uncertainty. But was curious to see if there is anything I am not considering before pulling the trigger. Basically, if anyone out there is thinking, "Holy crap you're about to make a huge mistake!" I'd like to know.