December 11, 2008
By: Paul Chadowski, CIC, LUTCF
Well-maintained, one-and-a-half story 1938 Cape Cod style 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 and game room; features include fireplace and two car garage.
How much would you pay for this home? $129,900 or$218,625?
This Pennsylvania home was recently advertised for sale with an asking price of$129,900. Based on current construction costs for the area, though, rebuilding this home would run about $218,000. Each of these numbers represents a very different value in dollars and cents. Understanding the distinction is important to protecting your most important asset – your home.
The selling price or market value of a home is determined by factors such as square footage, number of rooms, age, condition, and location, including the cost of land. In this case, $129,900 is the price a homeowner can realistically expect when selling this home in the current market.
The more costly price of $218,625 represents estimated replacement cost, which is the cost to rebuild basically the same house from the ground up. Insurance companies use this number to determine the value to which a home should be insured. Sophisticated software programs calculate replacement cost using a number of factors, 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
While some factors, such as square footage, contribute to both the market value and replacement cost of a home, replacement cost does not consider the cost of the land. For example, a Cape Cod home with a lake view would probably have a significantly higher 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’s not unusual for market value and replacement cost to vary. On average, market value is lower than replacement cost. In some cases, market value represents just one-half or one-third of the cost to rebuild.
Ideally, a home should be insured to its full replacement cost. In some cases, an insurance 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 this limit when a covered loss occurs, the Policyholder may not be eligible to receive the full amount needed for repair or replacement.
Consider this 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 the home was insured for 50% of the required 80%, the insurance policy will cover just 50% of the damages. The homeowner is responsible for the remaining $25,000, plus deductible.
We encourage Policyholders to insure their homes to the full replacement cost. In the event of a total loss, a homeowner policy provides only up to the amount stated in the policy. Even if the home is insured up to 80% limit of insurance, the policy will cover only that amount, not the full replacement cost.
Underinsurance among homeowners is a fairly common problem. It typically occurs when a homeowner takes on a remodeling or improvement project, but doesn’t make changes to his or her homeowner’s policy, according to a 2000 study by the Independent Insurance Agents and Brokers of America (IIABA). The study asked 1,324homeowners if they were planning to or had recently made renovations to their home. Of the homeowners who said they had recently made major structural changes, such as remodeling a bathroom or adding rooms, 60% said they did not update their homeowner’s policy. Of those planning to remodel in the coming year, 75% said they had not considered updating their policy. One in four remodeling projects increased home values by more than 25%, according to the study.
To make sure that a home is adequately insured, Policyholders should always notify their Agent of any major renovations or additions. Replacing a roof with one constructed of similar materials will probably not change the replacement cost of a home, but a new family room, finished basement or remodeled bathroom probably will. When in doubt whether a project will change your home’s value,it’s best to check with your Agent.
The amount for which your home is insured is stated on the declarations page of your policy. If you’re unsure that the amount is adequate, call your Agent. He or she can develop a replacement cost estimate based on the features of your home.
For most 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 insurance agent whose firm serves clients in Virginia, Maryland and the District of Columbia. He can be reached at 703.385.2066.
What’s Your Home Worth?
December 11, 2008
By: Paul Chadowski, CIC, LUTCF
Well-maintained, one-and-a-half story 1938 Cape Cod style 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 and game room; features include fireplace and two car garage.
How much would you pay for this home? $129,900 or$218,625?
This Pennsylvania home was recently advertised for sale with an asking price of$129,900. Based on current construction costs for the area, though, rebuilding this home would run about $218,000. Each of these numbers represents a very different value in dollars and cents. Understanding the distinction is important to protecting your most important asset – your home.
The selling price or market value of a home is determined by factors such as square footage, number of rooms, age, condition, and location, including the cost of land. In this case, $129,900 is the price a homeowner can realistically expect when selling this home in the current market.
The more costly price of $218,625 represents estimated replacement cost, which is the cost to rebuild basically the same house from the ground up. Insurance companies use this number to determine the value to which a home should be insured. Sophisticated software programs calculate replacement cost using a number of factors, including:
While some factors, such as square footage, contribute to both the market value and replacement cost of a home, replacement cost does not consider the cost of the land. For example, a Cape Cod home with a lake view would probably have a significantly higher 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’s not unusual for market value and replacement cost to vary. On average, market value is lower than replacement cost. In some cases, market value represents just one-half or one-third of the cost to rebuild.
Ideally, a home should be insured to its full replacement cost. In some cases, an insurance 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 this limit when a covered loss occurs, the Policyholder may not be eligible to receive the full amount needed for repair or replacement.
Consider this 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 the home was insured for 50% of the required 80%, the insurance policy will cover just 50% of the damages. The homeowner is responsible for the remaining $25,000, plus deductible.
We encourage Policyholders to insure their homes to the full replacement cost. In the event of a total loss, a homeowner policy provides only up to the amount stated in the policy. Even if the home is insured up to 80% limit of insurance, the policy will cover only that amount, not the full replacement cost.
Underinsurance among homeowners is a fairly common problem. It typically occurs when a homeowner takes on a remodeling or improvement project, but doesn’t make changes to his or her homeowner’s policy, according to a 2000 study by the Independent Insurance Agents and Brokers of America (IIABA). The study asked 1,324homeowners if they were planning to or had recently made renovations to their home. Of the homeowners who said they had recently made major structural changes, such as remodeling a bathroom or adding rooms, 60% said they did not update their homeowner’s policy. Of those planning to remodel in the coming year, 75% said they had not considered updating their policy. One in four remodeling projects increased home values by more than 25%, according to the study.
To make sure that a home is adequately insured, Policyholders should always notify their Agent of any major renovations or additions. Replacing a roof with one constructed of similar materials will probably not change the replacement cost of a home, but a new family room, finished basement or remodeled bathroom probably will. When in doubt whether a project will change your home’s value,it’s best to check with your Agent.
The amount for which your home is insured is stated on the declarations page of your policy. If you’re unsure that the amount is adequate, call your Agent. He or she can develop a replacement cost estimate based on the features of your home.
For most 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 insurance agent whose firm serves clients in Virginia, Maryland and the District of Columbia. He can be reached at 703.385.2066.