Replacement value double actual value - how to insure at lowest cost?

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We own seven multifamilies, with about 18 units, in a town where the cost of rebuilding is double what the properties are currently worth (even though they're all mostly renovated, in good shape, and bringing in an excellent return on investment).  The properties would probably sell in a range of 120,000 to 200,000 each, on average about 160,000.  If they were to burn down, we would NOT want to rebuild, since if we did, the properties would immediately be worth half the cost of rebuilding, because of the location. We would want to simply take the money and invest it elsewhere, possibly in an existing multifamily in the same town, since we could buy a similar property for 150K, whereas the cost of rebuilding would be 300K.  We don't want to insure them for replacement value and then take the money instead of rebuilding.  We just want to insure them for their appraised value, as appraised by the town assessor.   We currently have them insured for about the town's appraised value of each of them.  The properties are coming up for renewal, and we've put them out as a package to two different insurers, both of which refused to insure them for less than replacement cost - which means we're having to pay a lot more than we should for insurance.  But they both said it would be "unethical" to insure them for less than replacement value.

I figure that there have to be other owners of rental properties in depressed areas who can give us some advice.  The properties are in New Britain, CT.

Originally posted by @Karen F. :

We own seven multifamilies, with about 18 units, in a town where the cost of rebuilding is double what the properties are currently worth (even though they're all mostly renovated, in good shape, and bringing in an excellent return on investment).  The properties would probably sell in a range of 120,000 to 200,000 each, on average about 160,000.  If they were to burn down, we would NOT want to rebuild, since if we did, the properties would immediately be worth half the cost of rebuilding, because of the location. We would want to simply take the money and invest it elsewhere, possibly in an existing multifamily in the same town, since we could buy a similar property for 150K, whereas the cost of rebuilding would be 300K.  We don't want to insure them for replacement value and then take the money instead of rebuilding.  We just want to insure them for their appraised value, as appraised by the town assessor.   We currently have them insured for about the town's appraised value of each of them.  The properties are coming up for renewal, and we've put them out as a package to two different insurers, both of which refused to insure them for less than replacement cost - which means we're having to pay a lot more than we should for insurance.  But they both said it would be "unethical" to insure them for less than replacement value.

I figure that there have to be other owners of rental properties in depressed areas who can give us some advice.  The properties are in New Britain, CT.

 Hello Karen,

What you are experiencing is very common on the standard insurance world which most people know and operate in.  This of course is NOT the ideal as far as real estate investors are concerned.  The problem, as you probably know, is that MOST insurance people are NOT investors themselves and have no access or clue about the right options for real estate investors specifically.  There is nothing "unethical" for you as the investor to insure your properties for what you feel is right. That is just an excuse because they know no other way.

This higher and in most cases over inflated "replacement" value is imposed on most property owners choosing to or having to do business in the standard "personal lines" insurance markets, even in non depressed areas.

All of these insurers have what is called a Co-Insurance requirement and they typically use something like a Marshall & Swift replacement cost estimator.  So this estimator puts an inflated replacement value of let's say $300k and they come back and tell you that's what you have to insure for.  Their contracts state that you will have an obligation to insure anywhere between 80%-100% of that $300k, that is the Co-Insurance Requirement, and if you insure for less than that, you will be hit with a Co-Insurance Penalty in the event of a claim.  How this translates is this, if you insure for less and they deem you are 30% under-insured, based on their Co-Insurance Requirement, then they will reduce your claim by 30%.  That is the Co-Insurance Penalty.

All of their contracts also stipulate that in order for you to actually receive up to that $300k insured limit,  you HAVE to repair or rebuild.  However, like you stated, in many cases it may make more sense to cash out and buy something else and sell the lost property for lot value.  Their contracts discourage you from doing that by once again penalizing you and taking 40-50% of that value if you choose a cash-out provision.

Investors should not have to put up with this but most don't know they have alternatives out there that avoid these requirements and have many additional benefits as well.

Ivan

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