What is the difference between recovery and replacement costs- Importantly, the reconstruction cost(replacement value) is understood by the insurance company. The insurance company uses the current labor price and the material cost of the geographical area where the property is located to estimate the cost of complete reconstruction of the property with similar materials “on the ground”. This amount also includes “soft costs” that are often overlooked or forgotten, such as construction costs, licensing costs, and the cost of removing or removing damaged structures before restoration. From a strict insurance point of view, the cost of housing reconstruction has nothing to do with the purchase price, mortgage amount, appraisal value or market value of the real estate. In other words, the recovery cost is a completely independent value, independent of other values related to the property. For example, you may have purchased a real estate worth 230000 dollars, but because of the seller’s personal reasons, you can negotiate conditions to purchase at 180000 dollars. With a 20% advance of $36000, the mortgage balance was only $154000. None of them has anything to do with the actual cost of complete reconstruction after the loss.
How are recovery costs determined- Another common area of misinformation for property owners is how insurance companies actually determine the cost of property restoration. Different from the general view, this is not just a “blind guess” about the replacement cost of real estate. This formula is somewhat complicated. The formula of each company may be different according to the different data points used, but the process(simplified below) is usually the same. Most American companies pay huge amounts of money every year to make full use of Marshall&. Swift/Boeck(MSB) construction database. The company is a third-party company, experienced and respected, and maintains accurate construction costs(materials and labor) for each zip code in each county of the United States. The database is updated every 90 days and is usually very accurate. When requesting a new damage insurance quote, the agent may ask many questions about the physical characteristics of the property. For example, the area, floor, building type, roof material, exterior wall material, and what kind of cover plate are used. The purpose of these questions is to accurately understand how the real estate is built, so as to input information into the operator’s recovery cost software. After these data are obtained and entered into the system, the software will run together with the MSB database to compare the labor cost and material cost of the area and determine the fairly accurate cost required to rebuild the real estate at the current labor cost and material price. Even if the same data is used, two different companies can have two completely different recovery costs, which is related to their method of calculating internal cost estimates, rather than calculating the MSB database. For example, Company “A” can develop a recovery cost of $100000, but internal calculations can increase labor costs by 20%, “soft costs” by 5%, and material costs by 22%. Company “B” only uses Marshall and amp. Switch/forklift. The purpose of this is to be cautious, including extra profits, to offset unpredictable changes in actual costs after losses. The recovery cost formula of each company is exclusive. The agent store does not know how each company calculates the final cost and what the profit margin is. The final estimated cost of replacement is available to all agents.
Do two identical real estates have different reconstruction costs? In absolute terms, labor and material costs in other geographical regions vary greatly. In Texas, for example, a house in El Paso may cost $150000 to rebuild or replace. However, the size and physical characteristics of the same house are identical. Houston may need $210000 for reconstruction or replacement. As mentioned earlier, the reason is due to local building codes, road power prices, material costs and other issues.
Why is the reconstruction cost of new real estate higher than the selling price of construction stocks- One of the common differences between the insured property owner and the insurance company is that the cost of rebuilding the property is much higher than the actual purchase price of the newly built house. From the customer’s point of view, he or she may only have paid $200000 to the real estate, including the construction cost of construction shares and equity, land and all other related costs, but the insurance company determined that the replacement cost was actually $225000. Customers can’t understand why the reconstruction cost of insurance companies is higher than that of building owners. He or he often argues that the real estate is over insured. This is a logical point of view. But this is not the case. When builders build new houses, their construction costs are far lower than those of custom builders. The reason is simple. When a builder builds a new house, he or she usually builds more houses at the same time, in the same area or geographical area. This means that if the builders are not tens of millions of dollars, they will usually buy millions of dollars of materials and materials. This allows builders to obtain huge volume discounts in pricing, greatly reducing construction costs. In addition, the builder can use the same labor force to carry out the framework, concrete works and all other construction stages. The construction enterprise provides stable and repeatable workflow for contractors, who work in the same area for a long time, so the labor cost is greatly reduced. Not for custom builders. Rebuilding property is always more expensive than the first new property. If the two-year house you bought from the original builder for 200000 dollars is destroyed by fire, the contractor or builder you hired to rebuild the house will not enjoy the same discount on labor and material costs. In addition, in order to obtain new blueprints that are not available or significantly reduced by existing building owners, additional costs, construction, permit fees, debris removal, etc. will be borne. This means that you may need $250000 to rebuild a $200000 house.
Why is the cost of rebuilding old properties often higher? It is also important to understand that the cost of rebuilding an old property may be higher. In addition to all other aspects described, ancient real estate may have unique architectural features that are difficult to copy into current specifications and materials, some of which may require craftsmen specializing in tin ceiling, decorative molding and similar work; all this increases the construction cost.
After the insurance invoice is updated, will the recovery fee be automatically updated? Yes or no, depending on the company issuing the guarantee. Most standard enterprises automatically reprocess recovery costs when updating the warranty with previously provided information. This is why building owners can see that their insurance premiums and reconstruction costs are increasing every year. However, if the property has been improved or changed, such as space increase, elevation change, interior renovation or other changes, the recovery or replacement cost listed in the insurance invoice is inaccurate unless the insurance company is notified and new data is included. Therefore, the agent should always be contacted when making changes to the residence or property that may affect the final cost of recovery.
In conclusion, the actual replacement value of your property is much more important than simply extracting figures from the air. There is a systematic and perfect procedure to determine the actual expenses that may occur, and there is almost no relationship between the reconstruction cost of the real estate and the loan amount, assessment, taxation or market value. These figures are completely independent of each other. As the property owner and the insured customer, you have the responsibility to check whether your insurance policy contains sufficient guarantee coverage, and fully compensate you or replace(financially compensate for the loss) the property in case of loss.
