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Replies (2)
- Dan, "the_country_hick"
- Contributions:4699
"But...how does "cost" and "value" come play into the insurance equation - especially if the cost-to-build/replace exceeds "value"."
That is very simple. You get an insurance policy that covers replacement value. You could find that there are a lot of properties that would cost over $1 million to replace as they were built that sell for well under $300k. I am thinking of properties that have houses and barns with hand hewn beams. That kind of construction is prohibitively expensive to build with high labor costs. There are also sections in some cities where a regular house on a lot sells for much less than just building the house would cost. You have to buy insurance that covers the replacement cost. Some insurance companies will not even give you the money for the destroyed building but instead insist you rebuild a house where one was before it was destroyed.
A house may have a selling value of $200k yet cost over $400k to rebuild. Neither dollar amount can be transcribed into the other column. The worst part is every year replacement costs seem to increase even if values drop.
You can buy different types of insurance policies. Be sure to buy one that does not offer depreciated value on your belongings. Alos be sure to buy insurance that covers real costs of rebuilding including some demolition work. As I call it get the burn down build back kind of policy.
That is very simple. You get an insurance policy that covers replacement value. You could find that there are a lot of properties that would cost over $1 million to replace as they were built that sell for well under $300k. I am thinking of properties that have houses and barns with hand hewn beams. That kind of construction is prohibitively expensive to build with high labor costs. There are also sections in some cities where a regular house on a lot sells for much less than just building the house would cost. You have to buy insurance that covers the replacement cost. Some insurance companies will not even give you the money for the destroyed building but instead insist you rebuild a house where one was before it was destroyed.
A house may have a selling value of $200k yet cost over $400k to rebuild. Neither dollar amount can be transcribed into the other column. The worst part is every year replacement costs seem to increase even if values drop.
You can buy different types of insurance policies. Be sure to buy one that does not offer depreciated value on your belongings. Alos be sure to buy insurance that covers real costs of rebuilding including some demolition work. As I call it get the burn down build back kind of policy.
- Toby & John T. Williams, "tjplace"
- Contributions:271
Cost and Value have NO relationship in the real world. They are different in every market. The cost is the actual cost of an improvement. The value is what a given buyer is willing to pay for that improvement at a given point in time. Prime example, it may cost a local homeowner around me $25-50,000 to install and landscape an inground pool. When they sell the house, they will probably get around $3-5000 for that improvement! Some things you just do for yourself, not as an investment! You can add a $50000 kitchen, or $70,000 for a kitchen, is the buyer going to see the difference and pay more, or are they just happy to pay a higher price for an updated kitchen? That doesn't even take into account the law of diminishing returns. Too many improvements in the wrong neighborhood may not raise value at all after a certain point. You can do $500,000 WORTH of improvements in a $300,000 neighborhood. Probably, no one is going to pay anywhere near what it cost you. Keep this in mind when improving a property, keep it consistent for the neighborhood.
"Value" versus "Cost"
At one level, "cost" appears to have no direct relation to "value". If "cost" exceeds "value", then someone is going to lose money. If "value" exceeds "cost", then someone is going to make money. However, one does not drive the other.
t another level, it seems intuitive that there is a basic cost associated with house construction. When I was going to build, there were discrete costs for land, plans, permits, and materials/labor. Assuming that the land/plans/materials/labor is not overpaid for, it seems that there should be some correlation between "cost" and "value".
At a final (at least, for purposes of this discussion) level, there is the concept of "replacement cost", which would make sense to at least approximate "cost to build" (although I have empirical evidence that this may not always hold true). But...how does "cost" and "value" come play into the insurance equation - especially if the cost-to-build/replace exceeds "value".
Just curious about opinions from the RE community.
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