Understanding Home Valuation

The amount of insurance on a home should be based on its replacement cost, or the cost to rebuild, not the amount it would sell for on the housing market (market value).

Understanding and explaining how much a home is worth and how much it should be insured for can be difficult and confusing. The housing market is experiencing limited inventory and a steep increase in home costs. Add this to the sharp increases in inflation, especially that impacting the construction industry, and the uncertainty of possible tariffs. The discrepancy between the market value and the replacement cost can

be greater than ever, in some cases higher, and in others lower.

MARKET VALUE

To put it simply, the market value is the amount a buyer is willing to pay a seller for their home and the land it sits on. The market value is determined in part by the amount that other homes in the area are being sold for. Many factors including proximity to good

schools and local crime statistics influence this.

A home’s market value is often higher than its replacement cost, although this can vary depending on the age of the home, its condition, and its location. Basing the home’s coverage limits on its market value can lead to it being overinsured and a corresponding high premium or in some cases the home being underinsured with inadequate limits.

According to the US Census Bureau, the average sale price of a house in the United States rose 37% over the past five years. However, a home in a less desirable area may have decreased in value over the same period.

REPLACEMENT COST

Replacement cost refers to the amount it would take to rebuild your home from the ground up using materials of similar type and quality. This is based on the current market and local prices of construction materials and labor.

While the land will be included in the home’s market value, it is not covered by a homeowners’ policy and it is not included in the replacement cost. Rising labor, materials, and transportation costs can directly affect a home’s estimated

replacement cost. For that reason, homeowners’ policies include an inflation guard provision with an automatic increase based on inflation. RMIC regularly monitors multiple sources to ensure the automatic increase aligns with industry predictions.

ADEQUATE VALUATIONS

Changes to an insured’s property may occur over the life of a policy. Did the owner renovate their home? Add solar panels? Add a deck? If so, the replacement cost has increased, and the limits should be adjusted. Unfortunately, policyholders don’t always contact their insurance company when changes are made.

Renewals are the perfect time to reach out to a policyholder for a review of the value of the property and their insurance needs. RMIC utilizes e2Value to determine the appropriate value of a home. The e2Value can be completed anytime during the policy period to verify that the limit of insurance is appropriate.

Our goal at RMIC is to provide an accurate replacement cost so that the home can be insured to value. That means properly valuing the replacement cost for the home so that the homeowner can rebuild their home in the event of a loss.