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Home market value vs. rebuild cost

Old 06-01-2018, 01:07 PM
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Default Home market value vs. rebuild cost

Is there any direct correlation between the two? Any correlation at all? I can understand rebuild costs go up with increases in cost for materials and labor. Market value up with demand. Please educate me! As an aside, USAA once again has increased my homeowners to a point where they have just about priced themselves out of my market. Its a shame too as I've been with them for over 40 yrs.
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Old 06-01-2018, 01:14 PM
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Generally speaking no, although the cost to build does influence the asking price of a home but that value is theoretically capped by the market.

Replacement cost is net of land and in most cases the land value is the underlying driver to the homes value, but has no bearing on replacement cost.

Last edited by Fish'nFool; 06-01-2018 at 01:25 PM.
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Old 06-01-2018, 01:24 PM
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Originally Posted by Fish'nFool View Post
Generally speaking no, although the cost to build does influence the asking price of a home but that value is theoretically capped by the market.

Replacement cost is not of land and in most cases the land value is the underlying driver to the homes value, but has not bearing on replacement cost.
This^. We really ran into this when the market was down. Customer "I need $150K homeowners policy" Agent, "We ran a replacement cost estimate on it and you need $300K" Customer "Are you crazy? We only paid $150K". Agent "Could you re-build the house brand new for $150K?" Customer "Hell no it would take at least $300K". Point made.

Same with second point FishnFool made. We have also run into the opposite problems where there is a house that would take $300 to re-build sitting on a $700K lot. (Usually waterfront) Valued at $1 million and bank loans $800K and banks wants $800K on the house.
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Old 06-01-2018, 01:26 PM
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Insurable Value and Market Value are two different things.
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Old 06-01-2018, 01:28 PM
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Shag makes a good point, in a down market the cost to build could be higher than the FMV, which is why builders dont build in down markets, but the build cost is the build cost regardless of what the FMV is.

This is usually the exception rather than the norm.
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Old 06-01-2018, 01:29 PM
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OP,

I was a loyal USAA member for about 25 years until they raised their rates so much (more than double what I could get elsewhere) that we finally threw in the towel.

My current agent is also former military so he fully understood the difficulty it took to transition away from basically the only insurance company I had known.

Good luck in whatever direction you go.
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Old 06-01-2018, 01:31 PM
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Originally Posted by Shag View Post
This^. We really ran into this when the market was down. Customer "I need $150K homeowners policy" Agent, "We ran a replacement cost estimate on it and you need $300K" Customer "Are you crazy? We only paid $150K". Agent "Could you re-build the house brand new for $150K?" Customer "Hell no it would take at least $300K". Point made.

Same with second point FishnFool made. We have also run into the opposite problems where there is a house that would take $300 to re-build sitting on a $700K lot. (Usually waterfront) Valued at $1 million and bank loans $800K and banks wants $800K on the house.
family in my neighborhood went through that in 2012. Market wasn’t at bottom, but was still down. Bought a house for ~ 200k, and it burned to the ground taking all their possessions with it, a month to the day after moving in.........while they were at the hospital having a baby. Another house happened to have come up for rent in the neighborhood a few days before, which they lived in while they rebuilt. Their agent, knowing the totality of the situation jumped through hoops to get the temp residence stuff worked out in the rental and helped us make some calls to get them some basics in place for when they came home. Hospital let them stay one extra day as well. Happy ending, and having the right insurance and a good agent were key components of that being the case.
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Old 06-01-2018, 01:40 PM
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Working in mortgage, I see this all the time. "One of these things is not like the other!" Confuses the hell out of people. Replacement cost is to rebuild the home. Has nothing to do with the market value of the home. In the case mentioned above, we don't require additional coverage for the lot value. The lot is still the lot and once the home is rebuilt, the value of said together is still the same. Only exception to this might be an area deemed high risk by US Geographical Survey, where the lot AND the home have a chance of disappearing entirely. Think cliff side homes, or California falling off into the ocean.

My advice to the OP is shop it a bit. Really hard to beat USAA rates. I've been with them for years, as well. Make sure your getting a true apples to apples comparison on the coverages. I've found USAA offers a lot more coverage than many others.
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Old 06-01-2018, 01:44 PM
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According to the insurance companies, there is also a difference in how much it costs to rebuild from town to town...

For sh-ts and giggles, I have run a companies "replacement cost estimator" for my town, came up with a figure (say $500,000). Went back in to the client and did nothing more than change the town to one 4 miles away which is a lot more "dangerous" and less affluent and the value of the home dropped to $450,000. I then went and changed the town to a more affluent town about 8 miles in the other direction and the home value jumped to $530,000.

Considering all three of these would be using the same pool of suppliers etc, its amazing to see the difference.


Thanks Autobaun for mentioning "good agents". No doubt there are bad ones, but there are plenty of us good ones that have gone full tilt at our companies to make sure the client is properly taken care of.
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Old 06-01-2018, 02:15 PM
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...and don't forget that some unscrupulous insurance companies like to over insure your property knowing they will never have to pay out that inflated replacement cost they quoted you.
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Old 06-01-2018, 02:34 PM
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I've found USAA auto rates to be very competitive if not unbeatable. I'll be comparing home owners now. I was just trying to get a better understanding why their new rebuild cost was essentially the same as a very recent appraisal given the current up market.
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Old 06-01-2018, 02:41 PM
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Folks, as provided above market value has zero impact on an Insurance company derived replacement cost similar to real estate appraisal value, I work for largest insurer in Florida and most insurers utilize a replacement cost estimator from one of three vendors available here and country wide. I also have USAA homeowners insurance thankfully and will never give it up. To me the original post is like buying a high priced automobile or boat I cant afford and bitching about repair cost. The cost estimators utilize basically a rebuild price based upon market prices for building construction products prices, trends in cost of products ( ie. after major storm or not ) and based inflation costs and zip code based. Think of it this way, after most storms homes not totally destroyed (exception my time after Andrew), repairs based upon rebuilding / remodel costs. Ask anyone in construction field the joy of fixing or rebuilding someone else's shitty work. Big difference versus bare lot and building new home and no issues ( cost per sq ft approach). Rebuilding costs exclude slab below grade items (slab and plumbing in ground) and soft costs included for overhead and profit for contractors factored in. How many who live in Florida have ever looked closely at homeowners policy ? How many have increased limits for Ordinance and Law coverage or even understand what it provides? Understand the changes in Florida Building Code just over last ten years alone. Not preaching the insurance side of issue as everyone is a big boy and can make on decisions regarding your property, insurance needs and financial assets. I ps. do not have much of that beside my home and saw first hand for over two years the destruction Andrew did to so many, burned into my memory and something I will never forget and live in Jacksonville.
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Old 06-01-2018, 02:48 PM
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Originally Posted by Team Rock On View Post
...and don't forget that some unscrupulous insurance companies like to over insure your property knowing they will never have to pay out that inflated replacement cost they quoted you.
I have had it both ways (ha ha...). I had a client, friend of mine no less, that was insuring his home for $1.3 million. Insurance company came out, did a full inspection (not just an exterior) and said the home was $1.5M. About 10 months later, they had a TOTAL fire loss... I mean, the whole frigging house.

Insurance company said the home was overinsured and they were only going to pay $1.1M. I absolutely lost it on them and pulled out the inspection THEY did. In the end, they paid what they should have paid.

I have also had they same situation someone mentioned earlier, where the mortgage is A LOT higher than the replacement value. There are some mortgage companies that require the full amount of the loan be listed, whereas other will accept it if the "replacement cost on dwelling" endorsement is listed.
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Old 06-01-2018, 03:15 PM
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Originally Posted by Largefry View Post
. To me the original post is like buying a high priced automobile or boat I cant afford and bitching about repair cost.
How do you figure that? During the 20 yrs I've owned THIS house my rate has more than tripled. Its more like I no longer want to drive a BMW and will look to switch to a Toyota... or perhaps I'm just being a wise consumer.
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Old 06-01-2018, 03:21 PM
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I too have USAA and this last round of hikes I called them and explained they were trying to sell me what I wasn't buying. They lowered the coverage to meet my needs. Granted they send me an email every couple months telling me I may be underinsured but that's ok.
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Old 06-01-2018, 04:08 PM
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Originally Posted by johnb48 View Post
How do you figure that? During the 20 yrs I've owned THIS house my rate has more than tripled. Its more like I no longer want to drive a BMW and will look to switch to a Toyota... or perhaps I'm just being a wise consumer.
How have real estate and inflation rates compare during that time. I have owned my house for almost 10 years, and it has gone up by nearly 40%. What you are experiencing may or may not be out of line.
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Old 06-02-2018, 09:07 AM
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Originally Posted by tartuffe View Post
I too have USAA and this last round of hikes I called them and explained they were trying to sell me what I wasn't buying. They lowered the coverage to meet my needs. Granted they send me an email every couple months telling me I may be underinsured but that's ok.
Be careful. If there is a coinsurance clause in your policy, and you are say 10% underinsured with a partial loss of say $30,000 -- they will hit you with an additional deductible of $3,000 which is 10% of the repair cost. To my knowledge, standard homeowner's policies have a coinsurance clause.
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Old 06-02-2018, 10:02 AM
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Rebuild price and current value are two differing numbers that can align, but often don't. The same home could have been bought for $200k in a bad market, but cost $300k to rebuild. In a good market, the opposite can be true. Cost $300 to rebuild but market value $400.
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Old 06-02-2018, 10:18 AM
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Here is an extreme example, let's say you paint your house top to bottom, inside and out, with a custom $500/gallon paint that requires you to fly in some dudes from Italy to apply it properly. Also, the paint is metallic pink. The *replacement cost* on that would be insanely high, while it would also be so ugly and unique the *market value* would be well below average.

Again, this is a made-up example, but it illustrates how the two factors can differ significantly.
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Old 06-02-2018, 12:40 PM
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Originally Posted by SeaJay View Post
Be careful. If there is a coinsurance clause in your policy, and you are say 10% underinsured with a partial loss of say $30,000 -- they will hit you with an additional deductible of $3,000 which is 10% of the repair cost. To my knowledge, standard homeowner's policies have a coinsurance clause.
I had a claim for just about $30k after a water main ruptured in the attic in April of last year. USAA was fantastic. I paid my deductible and had no unexpected costs. I may have just been lucky to have them rather than another insurer as no mention of a coinsurance clause ever came up. Other than coming home to two floors of collapsed ceiling drywall, Bank of America was the worst part of the whole experience, not surprisingly.

Though it is a good point of consideration you brought up.
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