Guest Blogger Cindy Traverso from MTM Insurance
Insurance agents are your trusted advisors. They are here to help with any questions you might have as it relates to your insurance options. A common question Cindy Traverso at MTM Insurance receives from her customer is around “replacement cost” vs. “market value” of a home. Cindy explains the difference below:
When a customer asks, “Why is my house insured for more (or less) than the market value? If I were to sell it today I’d receive a different amount back than what I’m insuring it for!”
This is a common question asked by thousands of homeowner customers so I’d like to explain it a bit to clear up some of the confusion around this topic. Mainly, your insurance contract or policy is based on “replacement cost” which is defined as the cost to rebuild a structure, (your actual house) with materials of like kind and quality at “today’s prices.” This estimate includes labor costs, building permits, contractor costs and profit. Replacement cost is also different than new construction cost because often times site access is limited after a home is damaged, there are demolition costs, code updates, specialty contractors and other variables, all of which can make replacement cost higher than new construction costs.
Often times replacement cost is markedly different than the actual market value of a home, which is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. That is especially true in towns with extremely low home costs. The most important thing to remember is that market value includes factors which are not contemplated in the replacement cost calculation. These other factors can include land value, the quality of the neighborhood, the quality of the schools, as well as the community where the home is located. Market value also fluctuates depending on the supply and demand of the real estate market.
To sum it up, the insurance contract does not give you the option of insuring for market value. You choose your limit of insurance coverage based on the cost to replace the structure itself.
Hopefully this helps in determining the difference between the replacement cost and market value of your home. Making sure you purchase enough insurance is key, so be sure to discuss this and any other questions you might have with your insurance agent.