Selling house to previous owner

An interesting dilemma has possibly arisen for us.
We bought a property in March 2006 - small 2-bedroomed cottage and 1.5 acres of land. There are damp issues in the house and it is extremely small (900 sq ft approx) We now have one child and would be planning to have at least another one or two all going well. We paid €250K for it. We are seriously considering getting an architect involved to draw-up plans to extend and also deal with any damp issues in the main house. We were advised that it was not worth keeping the original building but we were thinking of just extending.

I was just speaking to the owner to get an address to forward some letters. She stated that she really missed her cottage and asked if we were thinking of moving. I said we weren't but am now thinking that we would be delighted to move and buy somewhere that suits our growing family. We could pump endless money to get the house right.

I know that we would have to get an estate agent in to get a true value the property in the current climate but does anyone know how much we could expect to get from the previous owner who really misses her old home? Should we be prepared to take a large hit to get away from the damp issues? Can anyone see any major problems with the tentative plan?

I would appreciate any views on this dilemma.
Thanks
Tommygirl

In this market I'd say a win-win would be for you to sell it back to her at the price you paid for it (actually that would probably be more of a win for you in this market but if she wants it that bad it could be a fair price).

Hard to say.
Damp issues are usually not that expenive to fix...if it is rising damp. a few €1000 (cheaper than moving house etc)

However it sounds like you really paid €250000 for a good site with an existing house. You have alot of room to expand even if the house is small. Would there be an option of selling a 1/2 acre site off to fund the rebuilding etc?

I imagine if you are financially secure you could knock the house and rebuild something to you exact spec...with out any difficulties.

Building costs have dropped dramatically recently.

Just an idea. Would it be possible to get planning permission for you to build a new house on part of the land and sell her back the cottage? You might have to take a hit on what you paid her in total but if she had a decent garden and you had a good site with permission, you would then be able to get a house suitable to your needs. Okay , it may take a while to do all this but it could be a win , win as building costs have come down. You might be able to rent the cottage back from her while you build or if the site was large , put a mobile on it while you build and save on rent.