What is the difference between replacement costs, appraisal value, and market price of a home?

Yes, this is a question that we get a lot here at the Shropshire Agency, especially with our homeowner’s customers. How do we get to this replacement cost value on our homeowner’s policies? And many times people think it’s either too high, most of the time they think it’s too high, so let’s explain what that is so you have a better understanding.

For insurance purposes, replacement costs, we’re interested in rebuilding back your home, the structure and using today’s cost. So if you have replacement costs on your policy and you were to have a tornado or a fire, or even a partial loss such as a roof, the idea is to rebuild back those damaged items or the entire structure at today’s cost of what it would take to rebuild that structure today or even put in the contents using today’s cost. So, the companies use a rating software to help calculate what that replacement cost is of what it is to build back.

Now, a lot of people compare that number on their homeowner’s policy to their appraised value on their property tax statement, and many times, especially now, you’re seeing your homeowner’s policies value is higher than your appraised cost. The appraised cost is a little bit different. That is used, of course, for taxation mainly here in Texas for property tax. What the difference is, is it’s not interested in what it takes to rebuild your home. The appraised value includes land, where your replacement cost doesn’t. It includes depreciation. It includes market conditions for the area of your neighborhood, or for some upkeep. Like if your neighborhood has done a lot of nice work and it’s really nicely kept, it increases the overall appraised value. So they’re not interested in what it takes to build back your home. It’s gonna be tied more to your neighborhood, the structure itself, the land that it’s on, and those other appealing factors.

Then a lot of the time people will ask us about the market value. They’ll look at their homeowner’s policy and say, well, if I could sell my home for what it would take to rebuild it, I’d be glad to today, because most of the time they think it’s too high. Well, market value is truly that. That is what the market says your home is worth. That depends on the flexibility of the availability of properties for sale. Your home in particular, where it’s located, the features that you have, so market value has nothing to do with what it takes to build back your home.

So just remember in insurance, we’re interested in values for the replacement cost of what it would take to build back your home and put back all your stuff at the time of the loss occurs at the cost of those items at that time.

We’d be happy to review your insurance coverage options with you! Give us a call at (806) 763-7311 or visit https://shropshireinsurance.com.