What is My Home Worth?

by agent and partner Ron Kadey

That’s a question that is not quickly answered.  In the property insurance business we try to avoid the word “worth”.  It’s too nebulous.  When my clients question the amount of coverage on their home I always start my explanation by clarifying the difference between “market value” and “replacement cost”.  “Market value” is what your home would sell for.  This value is determined by many factors e.g., square footage, amount of land, location, school district, mortgage market, waterfront or not, etc.  “Replacement cost” is a reflection of how much it costs to rebuild your home, specifically, a contractor’s cost of labor, material, and profit margin.  These two values are worlds apart.  Suppose we take a typical 2,000 square foot colonial and put it in the inner city area.  It would sell for maybe $70,000.  Next we place it in a typical suburban neighborhood.  Now the selling price or “market value” for the same house becomes $180,000.   Lastly, we now locate our home at a nice lake nearby with 200 feet of frontage.  Yikes, now it’s selling for $350,000.  However, the “replacement cost” is still the same, no matter where it’s located within the same general region.  The cost of labor and materials does not change. 
Most typically an insured will call and question why we are insuring his/her home for $200,000. when he/she can only sell it for $140,000.  But occasionally the question is reversed.  Just yesterday a client called and wondered why we insured his home for only $180,000 when he just paid $250,000.  Well, it’s because his home is a waterfront property.  This factor, or course, pushes the “market value” way beyond the “replacement cost”.
Therefore the most accurate and economical way to protect your home is to be sure you are insured on a “replacement cost” basis.

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