Purchase Price $77k. Rebuild cost $880k. Insurance

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Purchase Price $77k. Rebuild cost $880k. Insurance

Isaac Atwood
Member since 2019 · 8 posts · 1 vote

I purchased a 3 family for 77k. After repairs it will be worth around $150k resale value (TOPS). The insurance company refuses to insure me below a rebuild cost of $880k. 

I know this 3 family isn't worth anywhere near $880k, and the insurance premiums are killing me. How do I find a good actual value insurer that will insure to my after-repair cost and not my initial purchase price?

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Greg M.
Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes
6y
Originally posted by @Isaac Atwood:

Is it typical for a rebuild cost to be many multiples of the purchase price?

It can be. The rebuild cost has nothing to do with the purchase price. 

Take an extreme example: You can purchase 2,000 sq ft homes in Flint, MI for $1,000. If it were to burn down today, would you be able to rebuild that same home for $1,000? Reality is that it would probably cost you $200,000 to rebuild the home. After being rebuilt the home may still only be worth a few thousand dollars because no one wants to live there, but the insurance company would be on the hook to rebuild the place or give you the funds necessary to rebuild. 

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  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    6y

    @Isaac Atwood Welcome to BP! Itis time for a new insurance company. There are tons to pick from. I have some policies with Farmers and others at Lloyds.

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  • Isaac Atwood
    OP
    Member since 2019 · 8 posts · 1 vote
    6y

    Is it typical for a rebuild cost to be many multiples of the purchase price?

    0Reply
  • Greg M.
    Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes
    6y
    Originally posted by @Isaac Atwood:

    Is it typical for a rebuild cost to be many multiples of the purchase price?

    It can be. The rebuild cost has nothing to do with the purchase price. 

    Take an extreme example: You can purchase 2,000 sq ft homes in Flint, MI for $1,000. If it were to burn down today, would you be able to rebuild that same home for $1,000? Reality is that it would probably cost you $200,000 to rebuild the home. After being rebuilt the home may still only be worth a few thousand dollars because no one wants to live there, but the insurance company would be on the hook to rebuild the place or give you the funds necessary to rebuild. 

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  • Isaac Atwood
    OP
    Member since 2019 · 8 posts · 1 vote
    6y

    That was very illustrative Greg. I guess that the only real option here will be to find an insurance company that insures to actual value. I've heard Brandon and some other podcast speakers mention that they only insure to actual value, and I guess I know why now. 

    Does anyone know if an actual value insurer will allow me to set the coverage amount? Ex: If I believe a home should be insured for $200k would they let me insure to that amount? Or is this something determined by the appraisal or purchase price?

    1Reply
  • Matthew Olszak
    Real Estate Broker · Chicago, IL · Member since 2015 · 1k+ posts · 2k+ votes
    6y
    Originally posted by @Jeremy Goodrich:

    @Greg M. is correct.  His are extreme examples but yours is too.  The best way to know what it would really cost to rebuild a property is to ask a builder.  Take what they say and add the $20-30K it would likely cost to clean up the remnants of the house.  That would get you close to a solid guess on the replacement cost. 

    The ACV coverage arguments are dangerous. If it was as simple as choosing the amount and, if something bad happens, you get that amount, it would be one thing.  Then you could simply decide how much you want to insure and how much your willing to pay on your own. But there is COINSURANCE.  This is the big bad wolf that makes ACV policies dangerous.  Here's a video in the topic: 

    [Video link removed, maybe that's why his post was deleted?]

    Basically, you're going to get penalized for under insuring even with an ACV policy.  In ACV claim you lose depreciation AND if you under insure you get hit by the coinsurance clause. A $100,000 claim can turn into a $40,000 payout really quickly.

    So, smart investors insure for at least 80% of what it costs to replace a property.  If you're gonna do that, you may as well pay the extra 5% and have replacement cost coverage.  You'll be much happier in a claim scenario.

    IMO, if you're looking to lower insurance costs, raise your deductible.  It's the cleanest way to take some of the risk on yourself without getting burned in a claim. Have a $10,000 deductible before you go ACV.

    Great explanation. On the contracting/public-adjuster side we do mostly exterior storm-remediation work, and each year we have to break the bad news to at least a couple of our potential clients that their insurer is only going to cover say $4k of the $24k in work because they bought the cheaper ACV policy vs. RC.

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  • Isaac Atwood
    OP
    Member since 2019 · 8 posts · 1 vote
    6y

    Josh Dorkin and Brandon Turner both use cash value insurance. I'd be interested in hearing why you believe they are wrong, Jeremy. 

    Edit: It appears Jeremy has removed his post.

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  • Lynnette E.
    Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
    6y

    I buy Victorian houses from REO. I always get them below market and have major repairs. The insured amount is always at least double my costs or the market rate. But if the renters burn them down, I would have the ability to rebuild what I had, just not the old wood and windows and doors:(

    My insurer does let me lower the amount, but if I go lower I have to sign that I understand that the property is insured at an amount that would not cover all the costs for a rebuild and I am underinsured by XX%.

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  • Jeremy Goodrich
    Insurance Agent · Bloomington, IN · Member since 2019 · 41 posts · 17 votes
    6y

    Not sure why my original post was removed

    It is reposted below with the link removed.  Maybe that's the problem.  Here it is: 

    @Greg M. is correct. His are extreme examples but yours is too. The best way to know what it would really cost to rebuild a property is to ask a builder. Take what they say and add the $20-30K it would likely cost to clean up the remnants of the house. That would get you close to a solid guess on the replacement cost.

    The ACV coverage arguments are dangerous. If it was as simple as choosing the amount and, if something bad happens, you get that amount, it would be one thing. Then you could simply decide how much you want to insure and how much your willing to pay on your own. But there is COINSURANCE. This is the big bad wolf that makes ACV policies dangerous. Here's a video in the topic:

    (DM me if you want to watch the video)

    Basically, you're going to get penalized for under insuring even with an ACV policy. In ACV claim you lose depreciation AND if you under insure you get hit by the coinsurance clause. A $100,000 claim can turn into a $40,000 payout really quickly.

    So, smart investors insure for at least 80% of what it costs to replace a property. If you're gonna do that, you may as well pay the extra 5% and have replacement cost coverage. You'll be much happier in a claim scenario.

    IMO, if you're looking to lower insurance costs, raise your deductible. It's the cleanest way to take some of the risk on yourself without getting burned in a claim. Have a $10,000 deductible before you go ACV.

    0Reply
  • Jeremy Goodrich
    Insurance Agent · Bloomington, IN · Member since 2019 · 41 posts · 17 votes
    6y
    Originally posted by @Isaac Atwood:

    Josh Dorkin and Brandon Turner both use cash value insurance. I'd be interested in hearing why you believe they are wrong, Jeremy. 

    Edit: It appears Jeremy has removed his post.

     Apologies that my post was removed.  I do disagree with them for most of the investors on this forum.  ACV insurance is like Adjustable Rate Mortgage but more risky.  They both can trrick you into thinking one thing when the reality is something very different.

    If you REALLY know what you're doing, it MIGHT be right for you.  But for the rest of us its a way to get burned and lose a lot of money.  Josh & Brandon are example of investors that have a handle on everything at a pro level.  I'd have to look at their portfolio and chat through the price difference with them but I probably still wouldn't suggest ACV coverage.  The exception would be if they already have $20,000 deductibles, they still want to take on more risk, but they aren't quite ready to remove property coverage completely.  

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  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    6y

    @Isaac Atwood can you tell us where the property is located? That would help us determine if the rebuild cost is reasonable or not. As others have suggested, you should check with several insurance providers.

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  • Isaac Atwood
    OP
    Member since 2019 · 8 posts · 1 vote
    6y

    13905 area code.

    0Reply
  • Yonah WeissPro Member
    Cost Segregation Expert and Investor · Lakewood, NJ · Member since 2017 · 1k+ posts · 1k+ votes
    6y

    @Matt Moylan any thoughts here?

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  • Matt Moylan
    Insurance Broker · Kansas City, MO · Member since 2017 · 370 posts · 127 votes
    6y

    Thanks for the mention @Yonah Weiss!

    @Isaac Atwood it depends the risk tolerance you are willing to take on.  If you are very aggressive and only care about getting the money you invested into the property back, the ACV coverage would likely fit your needs.  If you are thinking buy and hold, and this property is one which you want to build your portfolio off of, replacement cost may be the best option.

    Regarding what you paid for it and the replacement cost. . . I would definitely speak with a broker to see what options they have.  

    Also, working with a broker who specializes in working with investors will benefit you greatly as they will have advanced knowledge of coverage's/products available/relationships with their company representatives.  

    What I advise my clients is lets look to see what the difference in both coverage options and premium totals.  From there, discuss pros/cons and decide which policy fits your investing tolerance the best

    1Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    6y

    I always use replacement insurance. (Not replacement value but actually replacement Regardless of cost) as explained in other posts you don't have to deal with an appraiser determine how much life you had left in every expensive part of the house. Many of my homes are in HOA's where you couldn't replace a home with a smaller/cheaper home if you didn't get enough money to replace the exact house that was destroyed. In the end it runs less than $20/year extra. $500-$600/year for $250-$425k properties.

    Ps. Thought fo this after posting. Do people who choose a certain value instead of replacement value consider the cost of removing the destroyed remnants? I assume that could cost $40k easy to tear down and remove the old property, especially anything that might have lead or asbestos in in.)

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