“I could never sell my house for that!” How many times have we heard this said or even said it ourselves? It’s easy to experience sticker shock when we see the value our insurance company wants to place on our home.
Calculating replacement cost ̶ or more accurately, reconstruction cost ̶ is often a complicated process, and results can deviate widely from market price. It’s not unusual for rebuilding costs to be significantly higher than the cost of new construction.
Reconstruction cost is the cost to hire a contractor to replace the home as it is, in today’s marketplace using materials and design of similar quality. While the cost of materials plays a significant role in determining the valuation, many other factors need to be considered but often are overlooked.
- Site accessibility – How easy or difficult is it to get to the home and build at the current location? Larger machinery may not be feasible. Is there a steep slope? Additional reinforcement might be needed along with special equipment. Are the homes in close proximity? Driving on the neighbor’s lawn might not be an option. Materials might have to be brought in by dolly and wheelbarrow. Or, the neighborhood might have parking or work hour restrictions that aren’t a problem when constructing an entirely new development, but must be observed when reconstructing a single home.
- Age of the home – As most insurance contracts guarantee to replace the home as is, older homes may have unique features that are difficult to replace. For example, the cost of plaster is higher than drywall. Builders of today are less familiar with older construction techniques.
- Custom features – Identifying the quality of your home is very important. In the event of a loss, are items easily replaceable by purchasing from a local retail store or is a specialized contractor or boutique store order necessary? Consider whether your home has special features such as designer wallpaper, built-in cabinetry, high-end appliances, carpeting, alarm systems, built-in stereo or media systems, finished finials, or upgrades such as gold leaf ceiling detail or custom window treatments, lighting fixtures or closets.
- Building codes – A rebuilt home may have to meet building codes that were not in place when the home was first built.
- Economies of scale – A builder can receive large discounts on materials and labor when many homes are built at the same time. On the flip side, when materials and labor are scarce due to economic or weather-related conditions, costs can drastically rise. And don’t forget engineering fees, contractor fees, labor and foundation.
- Time – Rebuilding a home typically takes longer than building a new home due to homeowner involvement.
- Demolition or debris removal – After a loss, a significant amount of cleanup may be required prior to starting the rebuilding process.
A home’s value in a real estate appraisal is often influenced by market value. Market value is the value that comparable homes are being sold for in that area. In contrast, reconstruction cost is our focus – what it will cost to rebuild the home with materials of like or similar quality, in a timely manner and with a builder who is basically building the home as a custom built house. Other considerations: the builder is not working on multiple homes in same vicinity, so no builder discounts apply, and some builders may not be interested in a rebuild project after a significant loss event.
So when you see the replacement cost valuation estimate on your homeowner policy, think about everything that goes into making your house a home.
Coverages described here are in the most general terms and are subject to actual policy conditions and exclusions. For actual coverage wording, conditions and exclusions, refer to the policy or contact your independent agent.