One of the most common questions is why the replacement/construction cost is often higher than the market value of the home. Market value is affected by today’s economic conditions, taxes and many other factors such as location of the home, the quality of school systems and the desirability of the neighborhood. A home’s current resale value could be much lower than it was even a year ago or two years ago. The term replacement cost can also cause confusion as many customers think of it in terms of “if my home was destroyed, how much would I need to buy a similar home”? In reality, customers are insuring their home so that if it were destroyed or significantly damaged, they would be able to pay for all the parts to be rebuilt. Think of it in terms of a car – you could buy a brand new car for $30,000. But if you had to buy all the parts individually for that car and put it together, the costs could be significantly higher than $30,000. Market value also includes the cost of the land, which will still be there if a home is destroyed. This means if you have a particularly valuable lot because of its size or location, the market value (home plus land) could actually be higher than your replacement cost of an average house on that lot.
But my home didn’t cost that much to build new!
This is a common statement when clients are presented with a reconstruction estimate that is higher than what they paid to build their new home. Insuring your home to original specifications with similar materials and craftsmanship is generally more expensive than building a new home from scratch. In fact, building experts say that it costs up to 30% more to rebuild a home than to build new. How is it possible for the numbers to be so different?
Economy of Scale – Typically, new homes built today are part of a housing development which allows contractors to purchase lumber, electrical and plumbing supplies in bulk at discounted prices. These large volumes make square footage costs much lower than building just one home at a time.
“Top-Down” vs. “Bottom-Up” – New construction begins at the foundation and builds upward. Repairing a house that isn’t totally destroyed often means removing the roof and rebuilding from the top down, a far more time consuming and labor-intensive procedure. Fire damage, for example, may need to be addressed by an expert who can work to mediate the smell of smoke through special sprays and other techniques. This type of construction would not be required in a new constructed home.
Demolition and Debris Removal – New home construction normally begins on open ground, perhaps with some brush removal and grading and other minor site preparation. Rebuilding begins with a partially or totally destroyed structure occupying the building site. Parts of the structure may still be standing but unusable, requiring demolition and removal. The site may have to be extensively cleaned – after an intense fire, for example, the soil may be contaminated. The foundation may have been damaged beyond repair. A lot of work is usually required before the first cement can be poured of the first nail hammered in.
Use of Labor – When a builder constructs many homes at once, they can efficiently schedule labor for carpenters, plumbers, electricians and other workers. For a single rebuild, labor is not as efficient and contributes to higher costs.
Access to Worksite – Worksite access is easier for brand new construction. For reconstruction, obstacles such as neighboring homes, trees, lawns, fences and other landscaping prevent easy site access. This makes it difficult to transport materials and can drive up labor costs.
Building Code Changes – Changes to building codes may require costly updating, even for undamaged parts of a home. This could include updating wiring or other utilities and is costly, especially for older homes.
Natural Disasters – After a natural disaster, the costs of building materials and labor rise because of increased demand. Over the past 20 years, there has been a significant increase in the frequency and severity of weather events, resulting in a high number of losses that require repairs. (See our blog post on using replacement cost estimators.)
Protecting Undamaged Parts of the Home and Contents – Keeping a partially destroyed home from further damage until permanent repairs can be made adds to the overall cost. This could involve covering a damaged roof or holes in walls.
Specialized Labor is More Costly – Reconstruction is often completed by contractors who specialize in rebuilding as opposed to new construction contractors. Their specialized labor tends to be more expensive.
Replicating Old Construction Methods and Materials – A standard homeowner policy provides for replacement with like kind and quality, which means replicating a home as it stands today. In older homes, interior walls are often made of plaster instead of drywall and exterior brick walls are made of solid brick instead of modern brick veneer. Homes constructed prior to 1940 were built with full dimensional lumber, which is larger and more costly than typical modern lumber. Because of features and materials such as these, older homes, especially those built prior to 1940, cost more to replace. In addition, the rising cost of commodities contributes to higher reconstruction costs. For example, petroleum based materials such as shingles have increased in cost dramatically.
Cindy Koegel is a Gillman Insurance Problem Solver and an expert in homeowners insurance. To get a quick quote or to ask any questions please contact Cindy via email at Cindy@GillmanIns.com or phone at 678-297-7977