Market Value Versus Replacement Value

Posted on: February 17th, 2011

Replacement value versus market valueIf you own a home in Las Vegas that was purchased before 2008, you have likely seen the value of your home fall dramatically.   At American Best Agency, we hear from customers almost daily wondering why, if their home is now worth $150,000, are we insuring it for $275,000?   To answer this question, we need to dive deeper into the differences between a homes market value and it’s replacement cost.

Market Value

By definition, the market value of your home is the highest price that a buyer will pay and the lowest price that seller will accept for a given property.   Market value will vary depending on geographic location, age, condition, floorplan, desirability and a myriad of other factors   Take for instance the below example of two indentical sized homes: 

  Home in Upscale Suburb Home in Depressed Area
Square Footage 2,500 2,500
Year Built 2005 1975
Bathrooms 3 full 3 full
Bedrooms 4 4
Garage 2 car 2 car
Market Value 350,000 200,000

Market value is subject to whims of the overall real estate market and will vary – sometimes wildly – over the years.  

Replacement Value

It might be more appropriate to describe this as “reconstruction” value meaning the actual cost to rebuild the home at the same location, with the same quality of construction at today’s labor and materials cost.   The replacement value is completely independent of and unrelated to the market value of your home.   Insurance companies and agents are concerned ONLY with the estimated replacement value and use this figure to structure a homeowners insurance policy. 

Determining Replacement Value

At American Best Agency, we use a complicated software program provided by Marshall & Swift to determine the estimated replacement value of your home.    We enter in the details of your home such as square footage, construction type and shape, roof type, number of rooms, baths, ceiling height, wall materials, floor coverings, garage size and type and numerous other features.  The software calculates the estimated cost of materials & labor necessary to rebuild your home.  For our local are – Southern Nevada – we find the average tract home caculates somewhere between $125 and $150 per square foot to rebuild.   A custom home will typicall run much higher – often above $200 per square foot.   

We realize brand-new tract homes can be built for less than $100 per square foot.   Keep in mind the economies of scale that make that kind of price possible – materials purchased in bulk for a 200 home subdivision will certainly be less expensive versus those purchased for the reconstruction of a single home.  Also remember that if an insurance company is paying for the complete reconstruction of your home it is because something terrible has happened, like a devastating fire.   There will be additional costs incurred for the removal of debris, architectural costs, increased permit and inspection fees.  

Let’s look at the example of the two homes again, this time with replacement value included:

  Home in Upscale Suburb Home in Depressed Area
Square Footage 2,500 2,500
Year Built 2005 1975
Bathrooms 3 full 3 full
Bedrooms 4 4
Garage 2 car 2 car
Market Value 350,000 200,000
Replacement Value 300,000 300,000

In this example, the two homes would have a nearly identical replacement value’s simply based on their similar size and features.   For a free evaluation of your homes replacement value, visit the website Building-Cost.net and answer a few questions. 

We constantly monitor the replacement value of your home and will adjust your policy as necessary to ensure your coverage is adequate, but not excessive.   As always, call us anytime to discuss your insurance related questions.  We look forward to speaking with you.