Your homeowner’s insurance policy should be large enough to ensure that you’ll be able to rebound from a catastrophe and return to your prior standard of living. Because of this, it’s likely your policy provides two types of coverage: rebuild value and personal property. Personal property limits are usually set as a portion of your rebuild value’s policy, but you get to choose the amount of your rebuild limits. Because of this, it’s important to have enough coverage without purchasing too large of a policy for your needs.
Rebuild Value vs. Market Value
Many homeowners confuse the market value of their home with the rebuild value of their policy. A home’s market value represents the price the home would fetch on the market, and can fluctuate wildly with conditions in the local real estate market. Rebuild value represents the cost of labor and materials to construct a house of similar size and quality, often from the leftover foundation from the destroyed home. While construction costs vary with the price of materials and labor, they’re typically much more stable than a home’s market price.
Impact of Land Value
Using the price you paid for your home as the basis for your policy’s rebuild value can be problematic. Your home’s market price includes the price of the property upon which it’s built, not just the cost of the structure itself. In areas where land is at a premium, real estate value can greatly increase your home’s market value independently from the value of its structure. For example, a 600-square-foot home on a lot in Brooklyn is worth more than an identical home on a lot in a Detroit suburb, although their rebuild costs would be the same.
The real estate market can also impact rebuild values in the other direction. If you live in an area where property values are in the dumps and sellers are unloading their homes at a loss, it may be cheaper to purchase an existing home than to rebuild a destroyed one. Because developers build in bulk, they’re able to build more efficiently, saving labor costs, while purchasing materials in bulk for a discount. Because of this, it’s often more expensive to rebuild a single structure in a tract housing development than it was to construct it in the first place.
Calculating Rebuild Value
While it’s easy to determine the market value of your home by surveying recent real estate listings for similar properties, calculating its rebuild value isn’t quite as simple. Your insurance provider will provide an estimate when you purchase your policy, but it may not be accurate: Make sure you report any additions or modifications to your home that would increase its value. Qualified commercial services, from local appraisers to online databases, also provide estimates on the cost to rebuild your home based upon local construction costs.
- Brand X Pictures/Brand X Pictures/Getty Images