Posted by: jmwilsonmga | September 20, 2011

Home Valuation Woes


With the current state of the economy and housing market, it is no surprise to anyone that homes are currently selling for half their normal value, and in some cases, being sold for even pennies on the dollar. This is obviously a great time for anyone with the means to do so, to be investing in real estate, however how do you properly insure the home given the discrepancy in value??

There are three main types of property valuation that we hear on a regular basis:

  1. Replacement Cost,
  2. Actual Cash Value, and
  3. Market Value or Purchase Price.

Replacement Cost refers to the total amount it would take to replace the home based on the amount it is currently worth.  Therefore, any unique or extravagant items will increase a home’s replacement cost.  For example, any additions or wings added to the home, or betterments and improvements to the main systems such as electrical, plumbing, etc.  Because the cost to replace a home exponentially increases as the building gets older, carriers have their own age requirements for offering replacement cost.

Some homeowners companies will offer replacement cost if the home is 40 years old or newer, while others will only offer replacement cost if the home is 15 years old or newer.  It is therefore important to know your company’s requirements for replacement cost, and whether or not your risk qualifies.

If your home does not qualify for replacement cost due to the age, the most common valuation used is actual cash value, which starts with the replacement cost amount, but takes into account depreciation based on the age of the home.   There are many valuation tools out there to help you pre-determine a home’s replacement cost and actual cash value figures; Marshall and Swift being one of the most commonly seen.  However, as a general rule of thumb, you can determine the actual cash value of a home by taking away 1% of the replacement cost value for each year since the home was built (up to 50%).  For example, if we had a replacement cost of $250,000 for a home built in 1990, the estimated actual cash value amount would be around $197,500 (2011-1990 = 21 years, X 1% = 22% of $250,000, or $52,500.  $250,000 – $52,500 = $197,500). When policies are bound, the inspection company used will also often have a cost estimator ordered to make sure the company has the home properly insured.  If the valuation comes back different from what was written, the company will typically require the value be endorsed to reflect the correct amount so that the home is properly insured to value.

99.9% of Insurance companies will not write based on market value or purchase price, because the difference in valuation is so great.  There are companies that in the past have allowed underwriters to add a market value endorsement form which amends all actual cash value wording to reflect market value, however this is becoming very rare as the economy and real estate markets continue to struggle.  We have seen instances where the replacement cost on a 1950 home is $200,000, the actual cash value is $100,000, but the insured was able to purchase the home for $15,000.  As the home is worth considerably more than the amount paid, it is not of benefit to have it insured to this amount in the event of a loss.  In an attempt to save
money on insurance costs, some applicants are requesting coverage for the purchase price only to cover their investment, however due to the moral hazard this presents, this is not something that is currently feasible due to the large difference in values, and not something most carriers are willing to offer.  This leaves the insured in a better position as well however, as if the payout on a total loss was only $15,000 for a home worth $100,000, this insured is not going to be able to rebuild.

As the economy and the real estate/housing markets gain momentum and are back on the upswing, we may see more companies willing to entertain a market value/purchase price endorsement, however currently, it is of the best interest of all involved parties that the home be properly insured to its current replacement cost or actual cash value amount.

About The Author : Stacey Kiser, Personal Lines / Garage Manager

Stacey has been a member of the J.M. Wilson Family for over six years and currently serves as the Personal Lines Department  Manager.  She oversees the day to day activities of the Personal Lines department in addition to the garage underwriters.  She also maintains her own book of business for both departments.  She loves the variety of her job and that every day poses new challenges and opportunities to solve problems.  In her free time, Stacey loves to paint, draw, write music, play the piano, and sing.

Connect with Stacey on LinkedIn!

Disclaimer :  This article is for informational purposes only.  There is no legal advice being suggested or proffered.  The author assumes no responsibility or liability for the actions taken or not taken by the readers based upon such information.  This article is the opinion of the author and is not supported or endorsed by J.M. Wilson.  It should not be relied upon and may contain inaccuracies or content may have changed over time, contact your underwriter for the most current and accurate information.  Any comments or responses are the opinions of their authors.  Content on this site is believed to be covered under Fair Use.

Copyright 2011 J.M. Wilson Corporation

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