When reviewing their Home Owner’s Insurance policy, a common mistake people make is assuming that the Replacement Cost (Coverage A) of their home should match the market value of the home.
Comparing these two values can be much like comparing apples to oranges.
The Market Value of a home is the value or estimated price agreed on between a willing buyer and a willing seller of the home.
The fair market value of a home takes many factors into account when determining what a consumer will be willing to pay for the home.
Market Value looks at such factors as; the current real estate market conditions, the availability of similar homes in the area, the local crime rates, local schools, the materials that exist within the home at the time of the purchase and, unlike Replacement Cost, the value of the land included in the sale package.
The agreed-on value is a Real Estate Appraisal of the property.
Replacement Cost, which is guaranteed by the insurance company, is an estimated cost to construct or repair the home using current prices with equal utility to the building being appraised.
The cost takes into account the current cost of labor and materials that may be required in the event of a home loss. The Replacement Cost is based on an Insurance Appraisal and does not take the value of the land into account.
A consumer may find a great deal when buying a home because they are buying from a friend or family, or it is a home foreclosure, or it is in an economically depressed area, for example.
However, if there was a total loss on the home, it would typically cost much more to rebuild the home based on the factors mentioned above. Because of this, it is important to remember, your Market Value will almost never be the same as your Replacement Cost.
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By Sean Crary