Author Topic: Help! Confused about replacement value for home insurance...  (Read 474 times)

betsbillabong

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I am under contract on a house (yay!) and need to submit proof of home insurance to the lender. So of course I spent today trying to track down estimates from two insurance agents recommended by my realtor (State Farm, Allstate) as well as getting an insurance broker to find me the best deal from a reputable company that he could.

The replacement value for my dwelling was all over the place between these three!

Home sold for 564K (almost 40K over listing in a bidding war, but still less than many comps).
Mortgage: Conventional 451K with 20% down.

It's in a HCOL area (Boulder County, CO). Here is what each estimated my replacement value to be:

(1) Safeco: $231K plus 100% extended dwelling coverage, for a total of $462K. Medium premium (around $1500)

(2) Allstate: $310K plus 'building structure reimbursement extended limits' (don't know if that is also at 100% -- it doesn't say on the document and I haven't talked with them yet). The lowest premium (around $1400)

(3) State Farm: $422K -- I don't see anything about 'extended', but again, I haven't been able to talk with them yet. The highest premium by far, probably because of the high value of the dwelling (around $2100).

(4): EDIT: Meanwhile, Amica allowed me to just input the replacement value (I put in 350K, which seems to be current appreciation over the assessed tax valuation from two years ago). But it seems like they can't just allow me to put in a number, right? Right? I could say I lost a million dollar home!

How do I choose? They all seem reputable, though I've heard that Allstate can scrimp on hail, and I live in a very hail-filled location. Will choosing low or choosing high hurt me? The broker who recommended Safeco told me that he could only bring the value up by a few percentage points, since the software had determined what the building cost would be. He is in a different and less expensive part of the state, but I assume automated software determines the cost/sf of rebuilding, etc, right? Obviously I don't want to be under-insured, but I don't want to throw away money, either -- I'm on a tight budget.

Thanks!
« Last Edit: June 29, 2020, 07:27:47 PM by betsbillabong »

LWYRUP

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Re: Help! Confused about replacement value for home insurance...
« Reply #1 on: June 29, 2020, 06:44:38 PM »

Does your tax assessor's office break down values between land and building?  That building value is one data point.
Ask your realtor if s/he can give you a ballpark of rebuild cost for a comparable home.  That's data point two.
The quotes you already have, averaged, are data point three.

Then average those data points and look at the number and see how it feels to you.

Once you get the number, you can probably convince the company you want to use that number.  They want your business. 

I am not familiar enough with the companies or your jurisdiction to recommend one in particular. 

Good luck and congrats!

betsbillabong

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Re: Help! Confused about replacement value for home insurance...
« Reply #2 on: June 29, 2020, 06:50:43 PM »
Thank you, @LWYRUP! This is great advice.

The tax assessor has the breakdown as:

Structure: 297,399
Land: 191,000
Total: 488,300

Which is also really scary since I just bought it for 564K, which was about the least expensive place to sell in town in the last few months, and I waived appraisal, but I digress.

I have a text in to my realtor. I like the idea of averaging those three numbers. Or maybe finding the median among the tax assessment, her estimate, and the three insurer's estimates.

Damn, this is hard to do on my own.

LWYRUP

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Re: Help! Confused about replacement value for home insurance...
« Reply #3 on: June 29, 2020, 07:05:08 PM »
Don't panic too much!  It's common in many jurisdictions for the assessed value to lag market values by 10-15%.  It makes it easier for the government to win on a tax appeal.  If you appeal, they've got about 10-15% wiggle room.  It also gives them room to secretly raise taxes by jacking up assessments in a budgetary squeeze.

The best test of the value of your house is market value.  So if it's on the affordable side and you won a bidding war, then you can't be too far off the real value.  If you are overpaying, it's only difference between you and the next highest bidder... not the end of the world. 

It's a tricky process but you'll be happy when it's done!

betsbillabong

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Re: Help! Confused about replacement value for home insurance...
« Reply #4 on: June 29, 2020, 07:23:06 PM »
Thank you! I am guessing the bank will tell me if the coverage is not high enough, since they are the ones on the hook (in a way).

It looks like this assessment was done two years ago, in June 2018, and the market has appreciated considerably since then. So there's that.

I am thinking that I should use that appreciation on the assessed value of the dwelling (roughly 298K) and add another 16% appreciation (a bit more than 564/488) to come up with a total of 345, eh, round up to 350K.

Does this seem like a good approach?

LWYRUP

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Re: Help! Confused about replacement value for home insurance...
« Reply #5 on: June 29, 2020, 07:30:09 PM »
What you are trying to get at is "rebuild cost" not necessarily "value of the building."  There are $2 million properties in CA that can be rebuilt for $500k and the price is what it is because of how difficult it is to navigate all the zoning / permitting rules.  What you are trying to figure out is this -- if this property burned down a few years after you moved in, what size check would you want to be able to clear the lot and rebuild from scratch?

Rebuilding, especially to a decent quality, can be expensive.  I was gravitating towards at least $350k based on the numbers you were throwing out.  $300k seems like it would be cutting it too bare. 
« Last Edit: June 29, 2020, 07:34:31 PM by LWYRUP »

SimpleCycle

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Re: Help! Confused about replacement value for home insurance...
« Reply #6 on: June 29, 2020, 07:39:45 PM »
Contact your lender or read the fine print of your mortgage paperwork.  We are required to carry insurance that would cover our full mortgage.

However, our actual policy declarations say structure coverage is something like 80% of our mortgage, but is paid out at 150% in a total loss.  I have no idea why.

Which is all to say figure out how much insurance you need, and then make sure each quote is comparable.  This involved talking to several companies on the phone.  Make sure all the deductibles and riders are the same too.  Then you can compare prices.

betsbillabong

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Re: Help! Confused about replacement value for home insurance...
« Reply #7 on: June 29, 2020, 07:46:30 PM »
Yes, I think I'm going to try to talk with both my lender and my agent tomorrow. This is way more confusing than I had anticipated.

waltworks

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Re: Help! Confused about replacement value for home insurance...
« Reply #8 on: June 29, 2020, 10:28:11 PM »
Seconded on Lwyrup's point - the goal here is to be able to rebuild the house (or something similar) if it's destroyed in a way that insurance covers (ie fire, tree falling on it, etc).

In Boulder I'd assume building costs in the ballpark of $200-250 per square foot. Maybe at the lower end if you're outside of the city limits, higher if you're on Mapleton hill or something.

I have a 3000 square foot house in a similarly expensive location and we have about $650k of insurance on the structure for that reason.

-W

LWYRUP

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Re: Help! Confused about replacement value for home insurance...
« Reply #9 on: June 30, 2020, 06:52:08 AM »
When I did this exercise, I ended up liking one company's quote but agreed with another company's assessment on replacement value.  Once I talked to the agent, she was able to adjust it. 

The lender was flexible because I could point to different numbers from a couple reputable companies (and because I was picking the estimate in the middle).  Some lenders will just ask for replacement value to match the mortgage.  That's usually pretty reasonable as well.

It's all just ballparking so don't worry about it too much, except better not underinsure if you don't also have cash or investments lying around to help rebuild in a pinch.

Paper Chaser

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Re: Help! Confused about replacement value for home insurance...
« Reply #10 on: June 30, 2020, 07:51:09 AM »
For what it's worth, my replacement cost was something like 1.5 times the purchase price of my home, and 2.25 times the tax assessed value from the county at time of purchase. That's in a LCOLA which cuts both ways as the value of my land is lower than yours (the house is far more valuable than the land it sits on), but materials and labor are cheaper to rebuild too. Building material and labor costs have gone up a bunch in the last 5 years.
« Last Edit: June 30, 2020, 07:56:32 AM by Paper Chaser »