Dwelling Coverage and rebuild costs too high?

7 Replies

Hey all, was hoping I could get some advice from other investors in RI. Im in the process of buying my first property. Its a 3 unit multi family. Purchase price is $207k, it appraised at $235k. 

Im to the point where I need to get a homeowners policy ready. The problem Im having is the 2 companies I have talked to so far came back with insane rebuild costs. First company said $770k and the second said $690k. I understand the rebuild cost can be higher than the market value but 3 times? 

Does this seem accurate? Curious to see what others have there dwelling coverage at.

Thanks for any help in advance.

-Coady

I'm sorry I should have worded that better. The house is fully rented and needs no work.

But I'm being told that I need to insure the building for the rebuild cost. Which is fine. But I don't see this house costing 690k to build.

Apparently all homes built before 1930 must be insured for the rebuild cost.

-Coady

Originally posted by @Coady Watson :

I'm sorry I should have worded that better. The house is fully rented and needs no work.

But I'm being told that I need to insure the building for the rebuild cost. Which is fine. But I don't see this house costing 690k to build.

Apparently all homes built before 1930 must be insured for the rebuild cost.

-Coady

A few ways to approach this.

1)  find a different insurance broker who can write an Agreed Value policy at market value

2)  Ask to see their Replacement Cost estimator.  That is the report they get detailing how they got to the #.  You can then discuss with a local restoration contractor and see if there is any discrepancy, then argue that point.

#1 is the easiest solution.

@Coady Watson does your lender require a certain percentage of the rebuild cost?

That’s how mine was and it doubled the initial premium. I bought it for 35k and the rebuild, replacement cost came in at 108k. It was build in 1948 and there’s a lot of brick.

To my knowledge there’s not a way around this. I’ve talked to several insurance brokers and they cant beat the price I’m paying but it’s ridiculous that a house that costs 1/2 as much as my others has twice the insurance premiums.

I can Insure another rental of mine worth around 80k for half as much as the other house. That’s a 4x Swing

@Jason Bott @Caleb Heimsoth

 Thanks for the replys.

Im going to call a couple different brokers today and see if they can get a lower number. Ive gotten 3 different numbers so far, $800k, 770k and 690k.  The people Ive talked to so far said they have to insure for the replacement cost because it was built before 1930. Not sure if thats a state law or company policy. The house was rehabbed in 2009 though and doesnt have a lot of the historic features that would normally be in a house this old.

I just find it crazy that anyone would insure something for 3-4x what they paid. 

-Coady

Coady,

The problem you are facing is common in Insuring Real Estate in the RI, CT, MA, NY markets.   The purchase price is driven by the rental rates not what it would cost to replace the building.  Insurance companies offer three ways to value a building for insurance:

1. Replacement Cost:  The cost to rebuild the structure with the same kind and quality at the time of loss

2. Actual Cash Value:  The Replacement Cost minus the depreciation (tracks with the market value of the building only not the land)

3. Agreed Value:  a value agreed on by the company to be the value being insured.  Much less commonly used.

Most Personal policies (Homeowners & Dwelling Fire) from the companies providing the best rate (on a per $1000 of coverage basis) will be written on Replacement Cost.   You can get the policies written on Actual Cash Value (ACV) but it is often from a specialty or non-standard market. 

If you do go with an ACV based policy remember, a partial loss will be paid with a deduction for depreciation.  Also, if there is a Coinsurance Clause you need to have a limit that adequate or you could face a penalty.  If you have an 80% coinsurance clause, you need to have a limit at the time of loss that is 80% of what the ACV should be.  If, at the time of loss, the company determines the ACV of the building is $100,000 your limit needs to be $80,000 or more.  If not the claim payment is reduced.

Good luck on the search and feel free to PM me if you have any questions on the above.