Insurance - Replacement Cost well over market value

30 Replies

 I have two properties in escrow in Saint Louis City. They are both four family properties in desirable locations (quality tenants).

The purchase prices are $349,000 and $290,000.  However, as these properties are all brick construction, the typical insurance quote provides astronomical replacement estimates (~$1M each).  I want sufficient insurance, but if something catastrophic were to happen I would construct under more modern building methods. Specifically, I would use wood construction with brick veneer. This is the method of choice for new construction in St. Louis. The goal would be to maintain the curb appeal / authentic look, but at a much lower replacement cost.

Thus, I'm looking to find an insurance agent / receive quotes that understand this dynamic. It makes no sense to me that I would insure a home from $1M, when the market value is $300K. Let me know if you think you can help, and I would love to discuss options available.

I'm planning to buy 3 more 4 family units this year, and will continue to buy multiple properties a year for many years to come. As such, it's important to me to find a solution to this problem, and the status quo of over insuring these properties just doesn't work for me.

Thanks in advance for your help!

@Edward Burke are you using a lender for these purchases? If so I’m guessing you got those replacement cost numbers off the appraisal?

I had this similar issue (Home valued at 40k, replacement value of 110k) which means my insurance costs went up. So far there hasn’t been much headway around this besides get a new appraisal or argue the former one.

Let me know if you find a solution

The value is from the insurance providers (quick calculations): USAA - I use them for everthing else today, Statefarm, and Nationwide.  The appraised value is more in-line with purchase price.  

The issue is that all older homes in St. Louis are solid brick construction.  The architecture is gorgeous, and the homes are of great quality.  To be honest, this was one of the major draws when I decided to invest in St. Louis.  The brick is so popular, that it is being illegally stolen from vacant buildings and shipped throughout the country for accent pieces, etc.

The problem with this nice material, is that it would be insanely expensive if you tried to replicate the building exactly.  What insurance estimates don't consider is that no one in their right mind would do that.  You would never spend $1M to build a building with a market value of $300K.  Thus, my thesis is that I should be able to insure the property for a more reasonable replacement based upon current building methods.  Specifically, wood construction with brick veneer.  

But yes, I am using a lender.  I re-read your question.  The appraisal is coming in this week.  I don't have the official replacement estimates from the appraiser yet.  

If I do find an insurance provider who agrees with my thesis, I suppose the next hurdle is making sure the lender also agrees.  I will reach out to them...

I didn't find USAA competitive for insuring my rentals. Try Shelter Insurance. Message me if you'd like a direct contact there.

@Edward Burke

What you are looking for is an Insurance Policy that replaces the Coinsurance clause with the Agreed Value clause.

This policy gives you the ability to insure a building for less than the Replacement Cost, without being penalized for not insuring 100% of the Replacement Cost.

Most companies do not offer this coverage, which is why your not getting great responses to your request.

Also, if your calling the companies you list above, they are not players in the commercial Insurance space, and the agents don't have the ability to craft a policy to your needs.

There are several insurance carriers that can do this.  I'll send you some additional info.

@Jason Bott - Thank you very much!  What you have described sounds like exactly what I am looking for.  I'll be on the lookout for the additional info.


USAA only offers replacement cost insurance.  The lender in my experience will need you provide insurance that covers the loan amount.  I have good success using Shelter insurance.  PM me if you need a contact for an insurance broker who understands your situation. 

@Jason Bott , could you please send some my way if you don't mind? I have run into similar scenario in mid-west but not in my home state. They told me labor cost is more in mid-west than in CA - at which point I couldn't stop myself from pulling my hairs.

I run into the same thing. The ins. co. will either insure in for what I paid for it, which is below market value or it's replacement cost which is unrealistic. I wanted to insure for someplace in between. Nope. Even though they get to set the premium. Typical Ins. Co. BS.

Shelter Insurance will write a policy for the cash value, basically the appraisal amount. The premium is much more reasonable! If there is ever a total loss, you'll be able to recoup your equity and pay off the loan which is all you really need with these very old properties. It would never be feasible to rebuild them like-for-like.

Glad to hear about shelter Insurance!  It sounds like they understand the St. Louis market, and appear to be the insurer of choice.  Thanks for the recommendation!

@Max Householder & @Edward Burke I just want to clarify that taking ACV is not the strategy I was referring to.  If you can get the Agreed Value coverage form, you keep Replacement Cost (RC) coverage. 

Most insurance companies will insure a building lower if you are willing to take ACV.  The insurance companies know if you take ACV instead of RC, their claim payout gets reduced by 25%-50%

@Jason Bott - If you have time tomorrow, it would be great to have a chat. I'm definitely trying to find the most ideal option, and will continue to need this type of coverage for future properties.

@Edward Burke   For lending purposes, you should only have a problem if the dwelling coverage is less than the loan amount.  If it is, they will ask for a cost estimator to show that the insurance would be sufficient to repair / rebuild the home.  But if your coverage exceeds the loan amount they shouldn't ask for the cost estimator.

I second Shelter Insurance in STL. Currently doing my second actual cash value insurance policy for one of my multi-families in STL. What I've found is that not all lenders understand or are accepting of the actual cash value policy, although it covers their risk exposure completely. In my case, I had to persuade Guaranteed Rate Affinity lender that they are fully covered, even without the Total Replacement Cost policy. I ended up getting a green light. @Megan Greathouse was able to introduce me to a great Shelter Insurance agent, who is truly knowledgeable, friendly and will fight to get you the best deal.

@Stephanie Irto - Thank you.  I will make sure that I at least have an "actual cash value" insurance policy, or "agreed value coverage" that is sufficient to rebuild the home under new building methods.  

@Steve Sherman - Another great recommendation for Shelter!  Thanks for the confirmation.  I also got a contact from @Megan Greathouse .  I'm thrilled to hear he is great to work with!  Where are you investing in STL?  I have two four families in escrow right now.  One is in Clifton Heights, and the other is in Southwest Garden.  

@Edward Burke I received your email and will send you some times I have open tomarrow.

Looking forward to discussing with you.

@Edward Burke I have 2 four families at this point in STL. One is in North St. Louis, in a nice, safer pocket of a bad neighborhood, with good cashflow and luckily, pretty good tenants. My second 4-family is in South St. Louis neighborhood of Carondelet, definitely a much safer neighborhood. Btw, Clifton Heights, and Southwest Garden, great neighborhoods. Personally, I've visited over 20 STL neighborhoods in person, to really get a feel for them. Some deals looked great on paper, but then you park your car on the block and get a feel for the pocket and realize that it's not something that you are comfortable with.

@Steve Sherman - Thanks, I really like the area that I chose to invest in.  I agree with you.....I found that the ones that looked the best on paper were the ones I felt the least comfortable with in person.  I've narrowed down the list to neighborhoods I would comfortably walk around with my family in.  I might miss out on some opportunities, but it's the measure I chose.  

Are you in, or near, Holly Hills?  I really like the properties in that area.  You also notice a sense of pride for the community.  People have Holly Hills flags on the front porch.  If I find a good property there, I will definitely buy it.

@Edward Burke - My Carondelet property is 5-7 blocks away from Holly Hills. Love that area as well. Beautiful architecture and greenery.

@Edward Burke - who are you using as your lender and how was your experience with them so far? I've used Guaranteed Rate Affinity, but the process hasn't been super-smooth with the 2 of my STL loans.

Hey Guys, I'll chime in quickly. If you're buying in STL and buying a city property you need to go with Shelter Insurance. You don't want full replacement cost in most cases. If your 100 year old solid brick home falls to the ground you would never rebuild with the same materials so the replacement cost will be a fraction building with stick and frame so that's really what you want to insure for. Shelter has by far and away the best policies for STL investors. 

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