The Tier 1 House Plan allows you to find a spot to put the foundation of your house. After building your house, the tier 1 house will appear. You can upgrade it by buying the Tier 2 House Plan
, going to your house, targeting it, and right clicking the Tier 2 Plan. Step back so you're not in the way, and upgrade. Building will continue like it was for the tier 1 house, except your tier 1 will still be intact. Once the contruction is complete, it magically gets bigger.