What's Your Home Worth?

in

By: Paul Chadowski, CIC, LUTCF

Well-maintained, one-and-a-half story 1938 Cape Codstyle home; 1,678 square feet of living space; includes three bedrooms,one-and-a-half baths, formal dining room, eat-in kitchen, living room, den andgame room; features include fireplace and two car garage.

How much would you pay for this home? $129,900 or$218,625?

ThisPennsylvania home was recently advertised for sale with an asking price of$129,900. Based on current construction costs for the area, though, rebuildingthis home would run about $218,000. Each of these numbers represents a verydifferent value in dollars and cents. Understanding the distinction isimportant to protecting your most important asset - your home.

Theselling price or market value of a home is determined by factors such as squarefootage, number of rooms, age, condition, and location, including the cost ofland. In this case, $129,900 is the price a homeowner can realistically expectwhen selling this home in the current market.

Themore costly price of $218,625 represents estimated replacement cost, which isthe cost to rebuild basically the same house from the ground up. Insurance companiesuse this number to determine the value to which a home should be insured.Sophisticated software programs calculate replacement cost using a number offactors, including:

  •       Local construction costs for building materials and labor
  •       Square footage of the structure
  •       Type of exterior wall construction - frame, masonry (brick or stone), or veneer
  •       Style of house (ranch, colonial, etc.)
  •       Number of bathrooms and other rooms
  •       Type of roof and materials used
  •       Fireplaces, exterior trims, and other special features like arched windows
  •       Whether the house, or parts of it, like the kitchen, were custom built
  •       Improvements to the home such as a second bathroom, an enlarged kitchen or other additions

 

Whilesome factors, such as square footage, contribute to both the market value andreplacement cost of a home, replacement cost does not consider the cost of theland. For example, a Cape Cod home with a lake view would probably have a significantlyhigher selling price than an identical Cape Cod near a busy airport.Replacement cost for the two homes, though, would probably be about the same.

It'snot unusual for market value and replacement cost to vary.  On average, market value is lower thanreplacement cost. In some cases, market value represents just one-half orone-third of the cost to rebuild.

Ideally,a home should be insured to its full replacement cost. In some cases, aninsurance company will allow a Policyholder to insure his or her home to just 80%of replacement cost. This amount is known as the "limit of insurance."  If coverage does not meet or exceed thislimit when a covered loss occurs, the Policyholder may not be eligible toreceive the full amount needed for repair or replacement.

Considerthis example: A home with a replacement cost of $200,000 and insured for$80,000 suffers a kitchen fire resulting in $50,000 in damages. Because thehome was insured for 50% of the required 80%, the insurance policy will coverjust 50% of the damages. The homeowner is responsible for the remaining $25,000,plus deductible.

Weencourage Policyholders to insure their homes to the full replacement cost.  In the event of a total loss, ahomeowner policy provides only up to the amount stated in the policy. Even ifthe home is insured up to 80% limit of insurance, the policy will cover only thatamount, not the full replacement cost.

Underinsuranceamong homeowners is a fairly common problem. It typically occurs when ahomeowner takes on a remodeling or improvement project, but doesn't makechanges to his or her homeowner's policy, according to a 2000 study by theIndependent Insurance Agents and Brokers of America (IIABA). The study asked 1,324homeowners if they were planning to or had recently made renovations to theirhome. Of the homeowners who said they had recently made major structuralchanges, such as remodeling a bathroom or adding rooms, 60% said they did notupdate their homeowner's policy. Of those planning to remodel in the comingyear, 75% said they had not considered updating their policy. One in fourremodeling projects increased home values by more than 25%, according to thestudy.

Tomake sure that a home is adequately insured, Policyholders should always notifytheir Agent of any major renovations or additions. Replacing a roof with oneconstructed of similar materials will probably not change the replacement costof a home, but a new family room, finished basement or remodeled bathroomprobably will. When in doubt whether a project will change your home's value,it's best to check with your Agent.

Theamount for which your home is insured is stated on the declarations page ofyour policy. If you're unsure that the amount is adequate, call your Agent. Heor she can develop a replacement cost estimate based on the features of yourhome.

Formost of us, our home truly is our castle.  It may be our most valuable - certainly our most used - investment.Protecting this investment should be a priority for any homeowner.

Paul Chadowski is an independent insuranceagent whose firm serves clients in Virginia, Maryland and the District ofColumbia. He can be reached at 703.385.2066.