When trying to insure a multi-family property, a lot of people want to insure it at a price that they have paid for it. Nevertheless, it does not consider what is going to happen in the case of property loss which needed rebuilding at current value.
What one has paid for a structure and what it is “worth” on the open market, aren’t the same thing. It’s critical, therefore, to understand the distinction between market cost and replacement value when seeking to protect your house.
Market cost, also called fair market value, is simply what it sounds like: the cost your private home might be appraised at in case you wanted to sell it. This value is usually what proprietors and managers sense their property is worth. It is primarily based on the building and other factors, such as, location, area crime statistics, local property climate (latest income in an area of comparable properties), and the quantity of the land on which your building is placed. i.e. lakes rivers oceanfront brings higher market value. Because actual estate values continuously fluctuate, this wide variety is probably to change over time.
Replacement is the real cost of putting the wood and hardware all back into place. It’s what an insurer agrees to pay for and the value most people would expect in a total loss of value. To restore the structure with like-kind, and quality as it was earlier before being damage. Replacement value is commonly calculated by the use of these factors: the cost of building materials and the value of reconstruction labor. These numbers are based at the constructing’s location, as labor can cost different from area to area. You should insure your home at least 80% of its replacement value. If not, your policy may not pay for all rebuilding expenses even if the coverage amount exceeds the cost of property damage.
How do I calculate the replacement cost of my Arizona home?
When you multiply your home’s square footage by the average rate, you can get a good idea of your house’s replacement value. The Arizona average charged by building contractors in 2018 was $119 per square foot (basic construction) (Range: $95.84 – $142.31). So, for example, if your house is 2,000 square feet, its replacement cost would be $238,000
Agents have special tools that can help calculate the exact amount of coverage you’ll need based on the replacement cost and market value of your home.
Why Replacement Cost is used for Ascertaining Property Coverage Expenses?
Quite simply you want to be able to rebuild if the home is completely destroyed. Think of it this way a house actually has three values we deal with:
- the assessed value,
- the market value,
- the replacement value.
The assessed value we all want low as that’s what our taxes are based on.
The market value could be high or low depending on aesthetics, good neighborhood, or bad. Lake, golf course, or high traffic noise can affect the market value.
The replacement is based on the cost of materials and labor for that area. This is the only number that will guarantee your house can be rebuilt and that you did not pay to much for your expected end results.
Again, trust your insurance agent, they have special tools to calculate the exact amount of coverage you’ll need.
Need help sorting out your homeowner’s insurance options? Speak with our independent insurance agents who can address any concerns you may have about Market Value Vs Replacement Cost. We’re here to help!