Replacement Cost Compared to Market Value
Whether it be a Home or a Commercial building. A common question is "Why is the Replacement Cost Limit greater than the Market Value of my Home?" The two values truly do not relate well to each other.
Let's use the example of an 1100 sq. ft. all brick home built in the 40s in what is now considered an economically depressed neighborhood. If there is a total loss, the owner needs a new home. The market value for the home may be $45,000. However, the Insurance Company is going to pay to reconstruct a comparable home (they are not going to take the Insured home shopping). Assuming today’s material and labor costs, the cost to reconstruct the home is likely over $200,000 (which may be closer to the market value if that same home was in an economically thriving neighborhood).
Why the Replacement Cost Limit is Greater than that Sale Price of a Brand New Home
The same thing can happen when a family or individual has a brand new home built and the RC value is greater than the new construction cost. Why is this? In a new subdivision, Builders typically build a number of homes at one time allowing them to take advantage of Economies of Scale. Example: when building multiple homes a builder will purchase windows, toilets, dry wall etc. for several homes. As a result the unit cost per item is significantly lower. Reconstruction Cost of a single home can be much greater.
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Posted by: Dan Hebbeln