Every home will have a market value and replacement cost estimate; however, each value is totally independent and applied to difference uses.
- Market Value = the price a property can realistically sell for, based upon other property sales in the same area.
- Replacement Cost = the cost to reconstruct a home with all of its unique features in today’s marketplace, using materials and craftsmanship of similar quality.
During the initial interview with home buyers to discuss insurance, one of the most frequently asked questions I hear concerns the proper amount that should be used for replacement cost on the home.
In Southwest Florida, we often see the purchase price of homes being well below the cost to rebuild them top to bottom. Most buyers don’t want to insure their new home for greater than the purchase price; however, insurance agents are required to insure homes 100 percent to value.
Here are few important things to consider regarding the various factors that influence replacement cost:
- After a total loss, let’s say caused by a fire, the remaining structure will have to be torn down and the slab removed. The homeowner will then have to hire an architect to design the floor plan and a contractor to pull necessary permits and build the new home. Each step in this process involves a cost. These individual costs may also need to be increased accordingly during a rush order.
- Developers buy and build in bulk. As a result, they purchase their materials at wholesale prices. Consider this same builder having to reconstruct just one home. Not only will their cost of materials go up, but also they will charge more for labor since they are looking to earn a profit from this single build.
- Many homes in southwest Florida fall into the custom or luxury category and contain unique architectural features that may require various skilled craftsmen to reproduce. If a custom home was built 10 years ago, some of the materials may be difficult or impossible to find and let’s not forget about new building codes. These factors significantly drive up building costs.
Ron Lazarto is a Client Advisor at Gulfshore Insurance. Ron works with a wide range of clients to deliver strategic risk management and insurance guidance. Comments and questions are welcome at rlazarto@gulfshoreinsurance.com
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