Posted by Randy -IL- on October 17, 1998 at 18:59:24:
Any insurance agent should tell you that the amount of insurance you buy is the Replacement Cost New (RCN) of the structure. Very different from the current market value. The market value is what the house should sell for on the open market. The market value can only be found by carefully studying similar structures in the local market that have sold recently. Market value is often much less than the RCN for a number of reasons (wear and tear, market changes, depreciation, etc.) Study your market.
If your house is insured for less than the replacement cost and it is destroyed, your insurance company will only pay out your insured amount. Chances are pretty good that you will come up short of cash when rebuilding.
Another way of looking at the houses FMV - Posted by GREEKVESTOR
Posted by GREEKVESTOR on October 17, 1998 at 17:39:17:
Hello,
Soon i will buy a 1FAM for $54K. It’s time to shop around for insurance. While shoping, all ins agents told me that the house is worth more than $54K, and that the minimum they can insure is appr. $120K.
Because replacement cost these days is appr. $60 per sq. ft. to reconstruct a residential medium quality structure.
Now, with all said, may I deduce that I’m “stealing the property”?
Please respond.
Posted by Ed Wachsman on October 18, 1998 at 05:20:09:
While I have to concede you might hit on the value by pure dumb luck every once in a while, relying on any insurance related measure is an absolute guarantee of substantial financial loss in most cases.
Think of a few gross examples and then understand that more subtle examples are at play on practically every property. Example 1. Find the worst neighborhood in your city. Put on your kevlar vest, higher off duty police to guard your work site and, if the “friendly” neighbors don’t manage to steal all the building materials and construction tools first, build a 1200 sq ft house. If construction cost and insurance replacement cost are $60/sq.ft. the house, by your standards, should be worth $72,000. Except that in neighborhoods like that in my town, I can buy them all day long in the low 20’s or lower. And if - a big if - you can find a true cash (via bank loan) retail buyer (not a lease option or land contract buyer)the absolute most it will typically sell for in my town is low to mid 40’s - and the truth is, it probably won’t sell at all at any price above mid-30’s. Example 2. You are a retired railroad engineer and love being near trains. So you build a house near a switching yard. What’s the chance that someone else is going to share your passion and want to live there and pay price comparable to a house of the same size and amenities in a quiet neighborhood. Practically zero.
Use the sales of comparable properties in comparable neighborhoods close to the subject property - the closer in proximity and the closer in size, style, age, amenities, neighborhood character the better. Forget insurance.
The only thing that you may deduce is that is the insurance agents are “stealing your pocketbook”. Call GEICO and ask them how much it’ll cost for insurance for starters. You might find it much cheaper than your “agents” are willing to match.
Why you would want to base the true FMV of your property based on what an insurance agent would like to sell you is beyond me…
Try a local Realtor or have your favourite Title Companies run a preliminary title search (usually free), and ask for them to throw in a list of comps, and public record info for these.
That should be your basis.
Of course, the true FMV is actually whatever Seller and Purchaser agree upon.