The Proper Way to Insure a Home

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replacement costsI remember speaking to a group of real estate agents in Douglasville back in 2006 on a caravan.  We were in a beautiful home in a subdivision with lots at least 1.5 acres. Keep in mind, this was back when the market was still excellent for sellers and property values were at their peak.  This particular home where the caravan was meeting sat on 5 acres.  The features of the home were as follows:
* 2 Story custom-built all brick home
* 6 Bedrooms, 6 full baths
* 5 Car garage
* Over 10,000 square feet of living area
* Fully finished basement with complete in-law quarters, including full stainless kitchen with all granite counter tops….in the basement!
* And more…

There was nothing in this home that was not the top of the line, from the Berber carpet, genuine hardwood floors, appliances, bath fixtures, 6 inch wood crown molding, and genuine cherry wood cabinets in the main kitchen as well as the basement kitchen.

The listing agent was in the meeting and I was explaining how to properly insure a home. Out of curiosity, I asked what the listed price was for this home. Keep in mind, there was not another home like this one in the subdivision, nor anywhere near the area. While the other homes in the subdivision were nice as well, none were like this one. This was the Mac-Daddy! The home was listed at $750,000, what a deal!

Now, if the new purchaser of this super deal came to me for an insurance quote and expected to have it insured for the purchase price and I wrote a policy for $750,000 to “protect their investment”, how surprised, no shocked, are we all going to be when the home is destroyed and a claim is filed. Let’s do the math…

$750,000 divided by 10,000 Square Feet = $75 per square foot to rebuild this home. $75 per square foot would barely rebuild a basic home on a slab with 4 sides vinyl siding! There is no way it would rebuild the home.

As a matter of fact, this home with all of its custom features would cost around $185 per square foot to rebuild. Do the math on that and the house should be insured for $1,850,000!

This was a rare case back in 2006, because at that time in the vast majority of the cases, it did cost less to rebuild a home than the purchase price. Then the insurance agent fought the battle with the mortgage company because the insurance policy was not written for 100% of the loan value. The appraised value or market value also included the value of the land, which has no bearing on the insurance policy. The insurance policy does not reimburse for damage to the land, only the home, personal property, loss of use, etc.

Insurance companies provide insurance agents with a computer estimating software from Marshall, Swift and Boeckh that is zip code specific so, we can plug the features of the home in, such as square feet of living area, type of home, exterior construction, type of garaging, etc., to come up with the “best guess” on the rebuild cost of the home. Many insurance companies will also send out their own inspectors to verify the insurance value is proper and would rebuild the home in the event of a total loss.

Especially in today’s market, people do not understand why they are paying $150,000 for a home that has to be insured for $280,000. The reason is the insurance policy owes to rebuild the home at today’s cost, not what the market says it is worth.

Make sure you are educating your buyer in every aspect of the transaction to avoid any surprises. The more you can educate them, the more credibility you bring to the table.

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3 Responses to “The Proper Way to Insure a Home”

  1. Cathy Witherspoon Says:

    Glen,

    Great article and perfect timing for one of my clients. He is paying $410K for a home originally listed at $599K. It has all the bells and whistles so I am sure it could not be rebuilt for the sales price.

    Thanks.

  2. Arthur Harris Says:

    Great article Glen. Most folks do not realize that market values may change due to supply and demand, however replacement value is what the house will cost to rebuild factoring the price of materials and labor at the time of loss.

    • Glen Curry Says:

      Arthur, you are exactly correct! It is so amazing the battles we face as an insurance entity that does things the correct way. In a really good market where the values are more than the replacement, lenders often want the policy to be for at least the loan amount. This is illegal in Georgia. Now in the current market, the buyers can’t seem to understand why they are having to insure for more than they are paying for it.

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