In recent months we have had the above question come up over and over... well, it finally happened!
Since property values have gone dramatically down over the past years costs of materials and labor have not. Therefore, when a home is at a purchase price of say, $300k, but if it were to completely burn down it would cost $550K than the insurance company will rate your house based on that value.
The hardest thing to explain to most consumers is that market value has no bearing on replacement cost. Most good agents do their best to use a cost estimator when they write a policy... we take a collection of info from the consumer, home square footage, type of building materials, number of bathrooms, type of siding, etc. and we plug it into a cost estimator usually by a company called Marshall & Swift/Boeckh or MSB, which has a computer modeling program that give us a value for rebuilding a home in a complete loss like a fire or Tornado.
Unfortunately like all other things, the information from the consumer is usually not exact and therefore you can get some variation in price predictions... The MSB is designed to give the best closest pricing for any given area in the USA and therefore if 10 agents use the program the pricing should be close for the same property.
This brings me back to why the difference relative to the above question. Market value is relative to what people are willing to pay to purchase a home. Replacement value is what it will cost to rebuild your home from the ground.
What is interesting about this subject is that before the housing market crash most homes were dramatically under insured because the rate of your insurance coverage did not keep up with the market rate of growth and the cost to build. Now we have an opposite situation that costs to rebuild stayed where they were or went up and market values went down.
My suggestion is this, give your agent as much info about your home as possible because you do not want to be in a situation that you can not get your home back to where it was. If you have the original listing from the MLS that is a great start.
Also, keep in mind that ultimately the burden is on you to make sure the replacement cost is correct. Your agent can do the math but you have to give him the correct info.
Since property values have gone dramatically down over the past years costs of materials and labor have not. Therefore, when a home is at a purchase price of say, $300k, but if it were to completely burn down it would cost $550K than the insurance company will rate your house based on that value.
The hardest thing to explain to most consumers is that market value has no bearing on replacement cost. Most good agents do their best to use a cost estimator when they write a policy... we take a collection of info from the consumer, home square footage, type of building materials, number of bathrooms, type of siding, etc. and we plug it into a cost estimator usually by a company called Marshall & Swift/Boeckh or MSB, which has a computer modeling program that give us a value for rebuilding a home in a complete loss like a fire or Tornado.
Unfortunately like all other things, the information from the consumer is usually not exact and therefore you can get some variation in price predictions... The MSB is designed to give the best closest pricing for any given area in the USA and therefore if 10 agents use the program the pricing should be close for the same property.
This brings me back to why the difference relative to the above question. Market value is relative to what people are willing to pay to purchase a home. Replacement value is what it will cost to rebuild your home from the ground.
What is interesting about this subject is that before the housing market crash most homes were dramatically under insured because the rate of your insurance coverage did not keep up with the market rate of growth and the cost to build. Now we have an opposite situation that costs to rebuild stayed where they were or went up and market values went down.
My suggestion is this, give your agent as much info about your home as possible because you do not want to be in a situation that you can not get your home back to where it was. If you have the original listing from the MLS that is a great start.
Also, keep in mind that ultimately the burden is on you to make sure the replacement cost is correct. Your agent can do the math but you have to give him the correct info.
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