Home Rebuilding Cost Estimate

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
User avatar
Topic Author
IFRider
Posts: 107
Joined: Thu Oct 10, 2013 3:40 pm

Home Rebuilding Cost Estimate

Post by IFRider » Fri Jul 08, 2016 12:35 pm

After several years lurking here, I finally have a question...

I bought my first house last September, and as a new homeowner, I'm learning a lot of things the hard way. But this one has me scratching
my head.

I bought my house for $205k. I live in Colorado.

During the purchase process, I arranged for my homeowners insurance and the insurance company established my "current dwelling coverage limit" at $174k.

I received a letter this week stating the insurance company has recently started using a new 'tool' to estimate rebuilding costs. The new rebuilding estimate is $261k. Further, since my new estimated rebuilding cost is higher than my dwelling coverage limit, my coverage limit will be increased to the new mininum rebuilding cost.

All of this makes sense to me except the numbers, they seem really out-of-whack to me.

So my questions are:

Why was the initial estimate so low? According to Zillow, I bought the cheapest house in my neighborhood at 205k.

Since the new estimate is $87k higher, I assume my insurance is going up...but by a lot? Can anyone provide a possible estimate? This letter didn't.

Will this effect my valuation for property taxes? Is there anything else I'm missing?

Thanks in advance for your input.

quantAndHold
Posts: 3438
Joined: Thu Sep 17, 2015 10:39 pm

Re: Home Rebuilding Cost Estimate

Post by quantAndHold » Fri Jul 08, 2016 12:45 pm

Insurance pays for rebuilding after your house burns to the ground. The rebuilding cost has to do with local construction costs, not with how much you paid for the house, or what local houses are going for.

If you think the rebuilding cost is wrong, you can contact a local contractor and get a ballpark price per square foot to rebuild. If that price is way off from what the insurance company is quoting, you can try to negotiate with the insurance company. You can also shop around.

Your insurance agent would have a better idea about how this is going to affect the price of coverage than random people on an internet forum will. You should always be shopping around anyway.

cadreamer2015
Posts: 899
Joined: Wed Apr 08, 2015 1:52 pm
Location: North County San Diego

Re: Home Rebuilding Cost Estimate

Post by cadreamer2015 » Fri Jul 08, 2016 12:54 pm

The home rebuilding cost doesn't necessarily have anything to do with your purchase price. Think of existing homes in Detroit which sell for $5,000, but which would probably cost several hundred thousand dollars to rebuild.

How large is your house? Most rebuilding cost estimators I've seen rely on the square footage of the house, plus some modifiers for number of bathrooms, quality of construction, etc. Rebuilding costs also vary considerably by area and may reflect zoning and building code requirements: for example would you be required to put in fire sprinklers if you had to rebuild? Some very round and approximate figures could be in the $100 to $150 per square foot range.

The rebuilding cost estimate should have no effect on your property taxes. Those should be based either on the purchase price or appraised/assessed value, depending on how your town/county does things.
De gustibus non est disputandum

afan
Posts: 4407
Joined: Sun Jul 25, 2010 4:01 pm

Re: Home Rebuilding Cost Estimate

Post by afan » Fri Jul 08, 2016 1:15 pm

You can do what Quantandhold suggest, but first make sure the information the insurance company is using is correct.
I had one experience, years ago, with a company that somehow changed the basic data on the size of my house. They insisted the new figure was right and changed our coverage. Dropped the company.

Building costs do change in response to the national and local market. You should be able to go through the construction of your house in detail with the insurer and come up with a good estimate of what it would cost. Older houses often have lower prices but expensive features like millwork and plaster. If there were to be reproduced they would be more pricey than conventional new construction.

Going over the information with your insurance company first should be free, although it may take some of your time to do the measurements, count the number and types of fixtures, etc. If your information is correct then I would hope the insurance company is right about the cost. After all, knowing how much they have to pay for replacing a house is their business.

If your insurance company cannot tell you how it calculated the replacement cost then you need a new company.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

User avatar
hand
Posts: 1354
Joined: Sun May 17, 2009 8:42 pm

Re: Home Rebuilding Cost Estimate

Post by hand » Fri Jul 08, 2016 1:21 pm

Insurance company likely has a financial interest in increasing your premiums paid so you are right to be suspicious.
Insurance profits are increased by overcharging and underpaying.

That being said, cost to rebuild could very well be greater than your cost to buy:

1) Rebuild after disaster requires demo & removal of existing structure
2) Rebuild requires bringing up to current code (more insulation, stronger structure, better electrical)
3) Rebuild resources (materials & labor) may be scarce in case of disaster that impacts more than just your house (think superstorm Sandy)

It is not intuitive that all of these risks should be addressed by an increase to your rebuild cost, but dynamics to be aware of as you work to understand the insurance "adjustment"

Smurf
Posts: 186
Joined: Wed Sep 12, 2007 8:48 am
Location: Midwest

Re: Home Rebuilding Cost Estimate

Post by Smurf » Fri Jul 08, 2016 2:53 pm

I recently had the same question. I was shopping for insurance and found widely varying replacement costs from insurers. Some of them were ~25% higher than others. In speaking with my agent he basically said everything already stated in the threads. It changes from building costs, demo can be expensive, have you upgraded items in your home (e.g. granite, hardwood flooring, etc). At the end of the day in the very unlikely event of a total loss would you rather be slightly over insured or under insured? Call some insurers and get quotes. They'll tell you the replacement cost over the phone based on what the magical system spits out.

User avatar
Epsilon Delta
Posts: 8090
Joined: Thu Apr 28, 2011 7:00 pm

Re: Home Rebuilding Cost Estimate

Post by Epsilon Delta » Fri Jul 08, 2016 3:16 pm

cadreamer2015 wrote:The home rebuilding cost doesn't necessarily have anything to do with your purchase price. Think of existing homes in Detroit which sell for $5,000, but which would probably cost several hundred thousand dollars to rebuild.
Of course rebuilding cost doesn't necessarily have anything to do with how much you would lose if your house burned down either.

If my house burned down my costs would be the net cost (which might be a profit) of whatever is required to clean up and sell the lot added to the cost of buying one of hundreds of almost identical houses within a couple of miles of my current home.

Rupert
Posts: 4122
Joined: Fri Aug 17, 2012 12:01 pm

Re: Home Rebuilding Cost Estimate

Post by Rupert » Fri Jul 08, 2016 3:17 pm

In my 20+ years as a homeowner, I have not found an insurance company in my region that will negotiate rebuilding cost. They have an algorithm. That's what they use. Take it or leave it. (That's typically what they say). Note that if your house is "special" in some way, i.e., in a historic neighborhood, etc., then you can purchase riders to increase the insured value of your home. My home is historic and would cost a ton more to rebuild in accordance with historic district regulations than I could ever sell it for. So I have what's called a "regulatory rider" on my policy.

mpowered
Posts: 51
Joined: Wed Nov 05, 2014 10:15 am

Re: Home Rebuilding Cost Estimate

Post by mpowered » Fri Jul 08, 2016 3:22 pm

I think what OP is asking is how it could have gone up so much in such a short time. There are two possibilities:

1 - They messed up and underpriced what it would cost to rebuild.
2 - Labor/materials market is extremely tight and costs have ballooned.

It's probably a combination of the two.

afan
Posts: 4407
Joined: Sun Jul 25, 2010 4:01 pm

Re: Home Rebuilding Cost Estimate

Post by afan » Fri Jul 08, 2016 3:48 pm

Much as I would love to believe otherwise, it is still possible that the old or new figures may simply be wrong. First check what they think they know about your house and make sure they are working off correct information. At least if you pay more, you will know why.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

User avatar
Topic Author
IFRider
Posts: 107
Joined: Thu Oct 10, 2013 3:40 pm

Re: Home Rebuilding Cost Estimate

Post by IFRider » Fri Jul 08, 2016 5:11 pm

Thanks everyone for the input.

I logged into my insurance company's site and checked my home characteristics. Everything is correct.
I guess I will just see what the new premium is and go from there.

Funny thing is, there is currently a tornado warning for my area! I hope I don't get an opportunity to put this
estimate to the test!

Ron Scott
Posts: 1090
Joined: Tue Apr 05, 2016 5:38 am

Re: Home Rebuilding Cost Estimate

Post by Ron Scott » Fri Jul 08, 2016 5:42 pm

The initial value could have been low because it was improperly estimated at the time you purchased coverage, or was proper at the time but hasn't been updated to account for the labor and materials costs in your area.

You WANT to be insured to value. Carrier tools improve all the time; hopefully yours has too.

Premiums always go up and so will yours. But its far worse to be underinsured and the numbers you're talking about are on the low side for residential real estate.

Insurance replacement cost estimates typically don't affect property taxes, although Colorado requires insurers to charge a "premium tax" (what else would you expect?) that may be correlated to replacement cost through premium increases. This is a tax on the homeowners premium and on your bill.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

EXH
Posts: 55
Joined: Thu Mar 31, 2016 7:21 pm

Re: Home Rebuilding Cost Estimate

Post by EXH » Fri Jul 08, 2016 6:41 pm

Sounds like a good change to me! Where I am $175k wouldn't build you much though... I always feel it is safer to be insured for a higher amount in case it ends up costing that much. And in case of a natural disaster like a tornado you won't be the only one, so construction prices would likely go up. We recently increased our coverage by 50k or so, and it didn't increase the premium that much (although this was a much smaller percentage increase of total that yours will be).

madbrain
Posts: 5243
Joined: Thu Jun 09, 2011 5:06 pm
Location: San Jose, California

Re: Home Rebuilding Cost Estimate

Post by madbrain » Fri Jul 08, 2016 7:28 pm

Ron Scott wrote: You WANT to be insured to value. Carrier tools improve all the time; hopefully yours has too.
Yes, that's what I want also - to be insured for market value.
But carriers do not allow it - they force you to insure for rebuilding cost.

Unfortunately, you do not have an option to insure for market value, if the insurance company's estimated rebuilding cost is significantly higher than market value of the property.

My home has a rebuilding cost of $1.8M - checked by several carriers with appraisers that came to the house. Carriers do this for all homes that their tools estimate over $1M. I bought it for $830K in 2010 as a foreclosure. That was the real market value at the time.
Currently, Zillow's price estimate varies from $1.2M to $2.5M depending on the month of the year, and is pretty much useless, IMO.

The only way to get around this would be to pay off your mortgage and then go without home insurance altogether - but that is not prudent.
There should be a middle ground to allow insuring for market value, or even any lower number that you want, if you are willing to accept a cash settlement and don't require the insurance company to actually rebuild the home in case of disaster. But there isn't such option. At least not here in California.

letsgobobby
Posts: 12080
Joined: Fri Sep 18, 2009 1:10 am

Re: Home Rebuilding Cost Estimate

Post by letsgobobby » Fri Jul 08, 2016 8:33 pm

I have the opposite problem.

My insurer will not increase their estimate and I cannot get more insurance. They may be right on the estimate but I tried to point out my home had several 'features' that wouldn't be obvious from a drive-by appraisal: heated floors, jetted tub, potfilling station at the range, extra sound insulation, etc. They politely responded that I had a very nice home "and it is adequately insured" at the listed amount.

There is a 'buffer' built in to most insurance products. Meaning if my rebuilding cost is estimated to be $500k and that is the basis for my premium, there is an extra 30% or $150,000 available when I need to rebuild. Thus the actual rebuilding costs could be as high as $650,000 and I would be covered.

GreenGrowTheDollars
Posts: 420
Joined: Fri Dec 18, 2015 11:09 pm

Re: Home Rebuilding Cost Estimate

Post by GreenGrowTheDollars » Fri Jul 08, 2016 8:41 pm

Rebuilding cost is OFTEN higher than market value.

That especially true in situations like wildfires where many homes in an area are destroyed -- the cost of materials and labor takes a huge jump up, and the timeline for getting the house rebuilt lengthens. People in North County San Diego that were hit by those huge fires a dozen years ago saw that. Many were further harmed because the old insurance formula assumed that the foundation would remain usable even after a fire. Turned out not to be true in the case of very hot fires.

There are also code issues, asbestos and lead paint abatement, and nonstandard building materials if your house is old. Demolition costs are another factor, and they are not cheap.

When a developer builds out a development and can keep crews and equipment efficiently scheduled, construction costs are at a low point. That isn't the case in a rebuild.

My insurance agent has a program and you can put in a tremendous amount of detail (I think my house ran 15+ pages of questions) in order to generate a more accurate rebuilding estimate. It included everything from the specific types and quantities of each window, height of rooms on each floor of the house, percentage of the roof with each type of roofing, roof architecture, bathroom and kitchen fixture quality,.... Might see if your agent has something similar.

madbrain
Posts: 5243
Joined: Thu Jun 09, 2011 5:06 pm
Location: San Jose, California

Re: Home Rebuilding Cost Estimate

Post by madbrain » Fri Jul 08, 2016 9:26 pm

letsgobobby wrote:I have the opposite problem.

My insurer will not increase their estimate and I cannot get more insurance. They may be right on the estimate but I tried to point out my home had several 'features' that wouldn't be obvious from a drive-by appraisal: heated floors, jetted tub, potfilling station at the range, extra sound insulation, etc. They politely responded that I had a very nice home "and it is adequately insured" at the listed amount.

There is a 'buffer' built in to most insurance products. Meaning if my rebuilding cost is estimated to be $500k and that is the basis for my premium, there is an extra 30% or $150,000 available when I need to rebuild. Thus the actual rebuilding costs could be as high as $650,000 and I would be covered.
How much do you think you are underinsured ? My house has fancy features too, but they accounted for it in their appraisal when they sent appraisers to my property. As a result, I'm insured for $1.8M base, but the policy would pay up to $2.5M to demolish/rebuild or maybe even a bit more. This really provides a huge incentive for fraudulent homeowners to burn their house down, IMO.

User avatar
Topic Author
IFRider
Posts: 107
Joined: Thu Oct 10, 2013 3:40 pm

Re: Home Rebuilding Cost Estimate

Post by IFRider » Fri Jul 08, 2016 11:30 pm

GreenGrowTheDollars wrote:Rebuilding cost is OFTEN higher than market value.

That especially true in situations like wildfires where many homes in an area are destroyed -- the cost of materials and labor takes a huge jump up, and the timeline for getting the house rebuilt lengthens.
It's interesting you mention this. My house is located near the Waldo Canyon burn area. But the insurance company knew this when they established the initial, low coverage limit. Also, the threat of a wildfire is greatly diminished now as I look out my living room window at the mountain faces covered with charred toothpicks that used to be trees. Is it possible they are trying to recoup their costs?

letsgobobby
Posts: 12080
Joined: Fri Sep 18, 2009 1:10 am

Re: Home Rebuilding Cost Estimate

Post by letsgobobby » Sat Jul 09, 2016 12:23 am

madbrain wrote:
letsgobobby wrote:I have the opposite problem.

My insurer will not increase their estimate and I cannot get more insurance. They may be right on the estimate but I tried to point out my home had several 'features' that wouldn't be obvious from a drive-by appraisal: heated floors, jetted tub, potfilling station at the range, extra sound insulation, etc. They politely responded that I had a very nice home "and it is adequately insured" at the listed amount.

There is a 'buffer' built in to most insurance products. Meaning if my rebuilding cost is estimated to be $500k and that is the basis for my premium, there is an extra 30% or $150,000 available when I need to rebuild. Thus the actual rebuilding costs could be as high as $650,000 and I would be covered.
How much do you think you are underinsured ? My house has fancy features too, but they accounted for it in their appraisal when they sent appraisers to my property. As a result, I'm insured for $1.8M base, but the policy would pay up to $2.5M to demolish/rebuild or maybe even a bit more. This really provides a huge incentive for fraudulent homeowners to burn their house down, IMO.
Yes, it's clear they don't want to perversely incentivize. I'm not underinsured by a ton, but I don't want to be underinsured at all. The numbers above are not my numbers, but I think with the buffer I'm probably ok. I never understood that buffer. Why don't they just insure for the proper amount?

jharkin
Posts: 2366
Joined: Mon Mar 28, 2016 7:14 am
Location: Boston suburbs

Re: Home Rebuilding Cost Estimate

Post by jharkin » Sat Jul 09, 2016 8:11 am

You got LOTS of good advice above.


Consider for a moment.... What if you get a contractor to give you a lowball estimate for $/sq ft to rebuild from scratch, and you get the insurance company to buy this and lower your limit to 200k.

How much will that reduce your premium per year? $50? $100? $150?


OK, now keep that in mind and imagine a tornado comes through and flattens the house. Every other house in town is wrecked and those contractors now have a 2 year backlog of work. Want to get to the front of the line??? That's gonna be $400k now thanks. Insurance company says - Here is your check for $200k, nice knowing you ;)

Not such a bargain now, is it?

afan
Posts: 4407
Joined: Sun Jul 25, 2010 4:01 pm

Re: Home Rebuilding Cost Estimate

Post by afan » Sun Jul 10, 2016 11:42 am

GreenGrowTheDollars wrote:
My insurance agent has a program and you can put in a tremendous amount of detail (I think my house ran 15+ pages of questions) in order to generate a more accurate rebuilding estimate. It included everything from the specific types and quantities of each window, height of rooms on each floor of the house, percentage of the roof with each type of roofing, roof architecture, bathroom and kitchen fixture quality,.... Might see if your agent has something similar.
Exactly this. Particularly for older homes, the methods that once were typical are now high end. Plaster, architectural millwork, hardwood floors, quality carpet, granite and marble and so forth. It took me several hours going through each room and collecting details and at least an hour on the phone giving the information. The result was a more accurate, but higher, rebuilding estimate. But if the house burns down, I want to be able to construct it again.

I don't get the logic of insuring to market value. Your house burns down, then what? Would any insurance company agree to pay you cash then you sell the lot as is and buy another house? Interesting strategy, but is that an option?
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

GreenGrowTheDollars
Posts: 420
Joined: Fri Dec 18, 2015 11:09 pm

Re: Home Rebuilding Cost Estimate

Post by GreenGrowTheDollars » Sun Jul 10, 2016 1:15 pm

IFRider wrote:
GreenGrowTheDollars wrote:Rebuilding cost is OFTEN higher than market value.

That especially true in situations like wildfires where many homes in an area are destroyed -- the cost of materials and labor takes a huge jump up, and the timeline for getting the house rebuilt lengthens.
It's interesting you mention this. My house is located near the Waldo Canyon burn area. But the insurance company knew this when they established the initial, low coverage limit. Also, the threat of a wildfire is greatly diminished now as I look out my living room window at the mountain faces covered with charred toothpicks that used to be trees. Is it possible they are trying to recoup their costs?
I doubt they are trying to recoup costs. Wildfires can cause a huge amount of damage even when you're in a suburban area. Take a look at these photos from the Witch Creek fire in San Diego http://www.sandiegouniontribune.com/pho ... niversary/#
Scroll through a few photos until you see the one on Aguamiel Road -- notice the not burned houses -- not exactly an area with lots of big trees. And yet, across the street, houses that were totally devastated. I used to live in this area, and I was amazed at the destruction.

I think getting the detailed rebuilding estimate is a very good idea. My insurer (State Farm) would work with either the detailed estimating program or a rebuild estimate from an architect. We chose the detailed estimating program because we have a very old house for the area.

Should I add that the current wildfire is 9 miles up the canyon from us? I'm hoping they get it knocked down before the winds pick up again.

User avatar
Epsilon Delta
Posts: 8090
Joined: Thu Apr 28, 2011 7:00 pm

Re: Home Rebuilding Cost Estimate

Post by Epsilon Delta » Sun Jul 10, 2016 1:44 pm

afan wrote:I don't get the logic of insuring to market value. Your house burns down, then what? Would any insurance company agree to pay you cash then you sell the lot as is and buy another house? Interesting strategy, but is that an option?
Yes, it's an option. There can be complications. For example a mortgage on an under-insured house, or if the house is insured for replacement value you might only get market value if you choose not to rebuild. A partial loss gets more complicated.

But what I don't understand is why most people would even consider a rebuild of a total loss. If I buy elsewhere I can be settled in a permanent home in about 3 months. If I rebuild it's probably close to 2 years. If the whole town gets wiped out I'd move as far as I needed to to get out of the disaster zone. It would take an unprecedented disaster to have to move as much as 10 miles, a tornado certainly wouldn't do it.

ParkersPaPa
Posts: 101
Joined: Sun Jun 14, 2015 9:16 am

Re: Home Rebuilding Cost Estimate

Post by ParkersPaPa » Sun Jul 10, 2016 1:55 pm

I've experience with "rebuild" values being seven time the "sale" value. There is no relationship between the two.

afan
Posts: 4407
Joined: Sun Jul 25, 2010 4:01 pm

Re: Home Rebuilding Cost Estimate

Post by afan » Sun Jul 10, 2016 7:43 pm

Interestingly, Zillow right now estimates the market value of our house as about equal to the insurance company's estimate of rebuilding cost. But that is pure coincidence.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

Post Reply