Today, more than ever, having a licensed insurance professional help to simplify the complexity of buying homeowners coverage is critically important. As we rebuild in the aftermath of Hurricane Irma, customers often want to understand exactly how insurance carriers determine the rebuild cost of a home.
When considering all the differences between rebuild costs versus market value, the comparison can easily become confusing. Rebuild cost, commonly referred to as “replacement cost,” is the cost of reconstructing your home and its unique features in today’s marketplace. Using similar building materials and the debris removal of the previous structure are factored into this amount.
In contrast, the market value or “appraised value” reflects what someone is willing to pay for your home today. Keep in mind that the location of the home often influences that price. The real estate market is a moving part that can be influenced by a multitude of factors, such as the value of the land, supply versus demand, etc.
Often the biggest discrepancy we see between the rebuild/replacement cost and market value is with homes in excess of $1 million. Florida is known for its sunny weather, sugar-sand beaches and waterfront real estate. While it may be everyone’s dream to sip a Pina Colada overlooking the ocean, those views do not come cheap. It is not uncommon for a home purchased for more than $2 million to only have a rebuild cost totaling $800,000. The primary factor in the large difference between the purchase price and the rebuild cost is often “location, location, location.”
Conversely, consider this possibility: “Why is the rebuild cost on my homeowners policy more than the purchase price?” To illustrate, let’s take a new construction home selling for $1 million. The rebuild or replacement cost could be higher than the purchase price or market value, because of the expenses associated with constructing an individual home Instead of building multiple structures at the same time. For example, contractors building a subdivision or planned community can take advantage of cost-saving factors such as economies of scale and effective labor utilization.
Depending on the specific damage, a partial loss can sometimes be more expensive to repair than a total loss. This is due to several cost factors, starting with the discovery of the loss and the risk mitigation services necessary to prevent further damage. Then the rebuilding process includes the following steps and associated costs: demolition of the damaged areas; detailed planning and matching of materials needed for the repair; services of engineers and/or architects; costs to obtain permits; and the legal fees that can be associated with repairing the home.