We all know today’s real estate market has seen some dramatic downturns in market value. What we may not know is replacement cost hasn’t nose dived like market value. In fact, if the National Association of Home Builders figures for the years 2002 to 2008 are correct, replacement costs have more than doubled for replacing certain portions of a home.
For example, tile and carpet replacement costs in 2002 were $6,506. The cost rose to $11,058 in 2008. Cabinets and countertops went from $6,568 in 2002 to $12,477 in 2008. Roof shingles went form $3,941 in 2002 to $7,070 in 2008. These figures are national numbers and may or may not be applicable in your area. I use them for illustration purposes only.
In our area we just had a giant REO sale. Houses sold from $45,000 to $19,000. The replacement cost on these homes is definitely hire than their sales price. This means the owners of these properties should pay attention to the type of insurance they place on their freshly purchased home(s).
The REO sale isn’t necessarily indicative of market value as a whole in this area but it is indicative of where the REO market is at this point in time. Granted some of these homes were what could be called junkers but the remaining properties were very acceptable properties. Regardless of their classification, if they burned down or experienced some other disaster, replacement cost would be staring the owners in the face.
Replacement Cost As the Insurance Company Sees It
Replacement cost is the actual cost of replacing property without a deduction for depreciation. If deduction for depreciation is part of replacement cost, you have what the insurance company calls actual cash value (ACV). ACV subtracts depreciation from wear and tear or obsolescence. As an insurance agent, I can state many people don’t understand the difference.
Because construction costs seem to be on a steady upswing, it is important to not only know the difference but to price them as well. While one results (usually) in a lower premium, it may not be cost effective. Here are some numbers to ponder.
We sell a policy in which the company offers coverage for up to 150 percent of the home’s insured value. This provides extra protection in the event unanticipated rising construction expenses make rebuilding costs higher than the estimated rebuild insured value. If that sounds like gobbly gook, don’t worry because your agent should explain it to your satisfaction.
The truth is many companies will include coverage for up to 125 percent in their quote. However, I wouldn’t take it for granted that will happen to you when you shop for a policy. I would always ask the agent what the coverage includes. If it doesn’t include the extra coverage, whther it is 125 or 150, I’d continue to shop.
Shop Till You Drop
I say that because of the crap I’ve seen perpetrated against people in this business. For example, we had a client who was paying a certain big named company $5,000 a year until he came to our office. We lowered his premium by $2,500 while still writing his home with the 150% coverage. Read that again and you’ll see we saved him a little over $200 a month.
Since this particular gentleman was retired, the $200+ a month was, in his words, a blessing. I’m not retired but an extra $200 a month would be a blessing to me too. I don’t tell you this story to toot my own horn. I tell you this story so you’ll be inspired to shop for both the coverage you want and the premium you’d like to pay.
You may not get the premium you think you should have but I’d bet you can come close. You see, just because the company advertises on TV and sponsors a ton of sporting events doesn’t mean their rates are the lowest.
Here is another real life example. A certain well known organization touts saving its members upwards to $400 a year on their car insurance. The truth is if 60% of those members actually shopped their insurance with the same company this organization uses to write the insurance, they would save even more money. How about that for an oxymoron…
A Few More Points To Ponder
I think you get the replacement cost concept as well as the shop till you drop suggestion when it comes to placing insurance on your property so I’ll toss out two more suggestions. The first is claims.
If you have to use the replacement cost feature of your policy, that means you have made a claim. Does your company timely respond to your claims? 24 to 48 hours is a good response time with 24 or less being preferable. However, 24 or less is not necessarily going to happen in. let’s say, a simple fender bender type of accident.
At the other extreme, when my friend’s home was destroyed by Hurricane Rita, 48 hours didn’t happen. There were simply too many destroyed homes to be at everyone’s property in 48 hours or less.
Most people understand this fact and accept it. However, if you aren’t experiencing a hurricane or an earthquake or a devastating fire, 48 hours or less should be the norm.
Something most people aren’t aware of is the included coverage for identity theft. Most carriers will include this coverage as part of a selected coverage package. If you are concerned about identity theft, you should ask about this coverage. I include this piece of information because of the rise in this particular crime. Besides, if you don’t want it, you can exclude it and lower your premium.
I think if you understand the difference between market value and replacement cost and the concept of shopping for insurance you should have a handle on a part of this real estate investment business that is pretty important to your pocket book. They are both related more than most people realize.
Photo Credit: TheLizardQueenReal Estate Insurance: Market Value Is Not Replacement Cost by Tom Koziol