THank you, everyone, for all your thoughtful responses. Honestly, I have been mulling this decision over with lots of friends, relatives, etc, but it is really excellent to get advice from like-minded people (or so I like to think; I aspire to be a mustachian) I am sort of blown away that people would take time out of their day to give me their analysis. Again, many, many thanks. :) :) :)
Anyway to answer all the questions:
(1) THGE LOT We bought the lot less than a year ago with the idea that we would save up and build on the lot. We bought the lot after a couple of years of looking and not being able to find anything we liked. Clearly, were are house-picky. We spend tons of time at home and want to create an awesome little slice of heaven for our daily living. Anyway, the idea was to stockpile cash and build on this lot in a year or two, coming out debt-free given the 550k equity in our current home. Finding this new fixer upper I now have my eye on was simply something I saw biking home from work one day. On an impulse, I called the realtor and saw the place and well, you know the rest. Back to the lot, though; that location is convenient too, but not quite as much as the neighborhood where the fixer upper is located: The feel is more suburban but it is still an easy 10-15 minute bike ride to downtown and ALL THINGS. THe bitch is that it's an uphill ride on the way back up to the lot and you are riding on a busy street. The lot is in a fancy-pants suburban-feeling neighborhood. I didn't love that part of it, but I loved the views of the whole city and the relatively convenient location and the light, bright, high-up sunny feel.
(2) GOALS IN TERMS OF INVESTMENT VS. THE PERFECT HOME. I don't place a high premium on recouping my investment in the fixer upper. The plan is to live there possibly forever. THat said, I don't want to be a complete moron and have $1 million into a house that will sell for like $500k. My main stomachache right now is whether we can pay our freaking without stress during the process and before the damned lot sells. Again -- the only debt would be the roughly $350k mortgage, assuming, of course, that I could control renovation costs, which sounds nearly impossible based on what I am reading here.
(3) COMPS TO THE FIXER-UPPER, AFTER RENO The house across the street from the fixer-upper I want to buy is worth $900,000 (a realtor recently evaluated this home for an acquaintance of mine who is living there), and is an excellent comp in terms of square feet and lot size. That house has been totally remodeled. Similarly, another neighbor house is probably worth about $700k and sits on a much smaller lot than does the fixer-upper. Other houses on the block are also lovely. A house a couple blocks away on a super-crappy, tiny lot recently sold for $875k after less than a month on the market.
(4) LOCATION OF MY CURRENT HOUSE/REASONS FOR WANTING TO SELL. My current house (the 550K one near the rentals) is actually not in a suburban area. IT IS LESS THAN 5 BLOCKS FROM THE FIXER-UPPER. How can that be possible, you ask? Well, I live in an historic neighborhood and the blocks are patchy and bizarre. You will find a meth house across from an $800,000 place -- no shit. (For example, just this past summer, some developer bought the old meth house about 2 blocks from me, razed it, and put up a new house (historic looking, as it must be now that the historic district rules the place) that will go on the market for around 625k. So the trend has generally been upwards in the 10 years I lived in the neighborhood. The typical scenario is that grandma dies in her bungalow and then someone with a shitload of money moves in and renovates the hell out of the place and makes it house and garden beautiful.
Except on my freaking block (current block -- not fixer-upper block). The problem on my block is that one person owns 50% of the houses on the block and she is trashy in terms of keeping up her places. AS in she does not water the lawns half the time, stuff like that. She sometimes parks her car on her lawn by her front door (what the hell???). Her son lives in one of them and we have chatted and they have no plans of selling any of these little cash cows. Ever. (If I had been thinking straight, I could've figured this out when I moved in 10 years ago, but she took a lot better care of the places back then.). So, the truth is that I just got unlucky, I guess, in terms of the damned block I landed. The blocks immediately to the north and south of me are fantastic -- 100% owner occupied and within the past year 2 of these houses sold in the 600k range. If I lived even on those blocks, I would not move because I adore my current house and yard. The rentals are just driving me crazy. I realize that sounds crazy, but honestly, imagine living next to a frat house. That's what I've got going on with one of the rentals right next to me. Parties at 4 am on weeknights that wake up the kid; beer bottles in my front yard the next morning -- shit like that.
Anyway, I am still mulling it over. Thanks again for your thoughts and advice. I will let you all know what we decide.