A common misconception among investors is that a property’s insurance amount should match its market value. However, as you know, market value and rebuild value are two distinct figures, and confusion could leave your clients underinsured or overpaying for coverage. Use the outline below to help educate your clients on the differences between market value and rebuild value.
What is Market Value?
Market value is the price a buyer would pay for a property today, or what a seller would expect to receive. It’s influenced by numerous factors, including:
- Location: Desirable neighborhoods, school districts, and proximity to amenities drive higher prices.
- Demand: High demand in a competitive market can drive property values up.
- Property Size & Features: Larger properties or those with upgraded features can command higher prices.
- The Condition of the Housing Market: Market trends, interest rates, and economic conditions impact values.
- Land Value: Market value includes the price of the land the property sits on.
- Rental Income Potential: Properties with strong rental demand or cash flow potential likely carry a higher market value.
Clearing Up Confusion
Your clients may mistake a property’s assessed value or appraised value for its market value, but the amounts likely differ significantly. When discussing with your clients, clarify that:
- Assessed value is determined by local tax authorities to calculate property taxes. In most areas of the United States, a home’s assessed value is a portion or a percentage of its market value. Note: This often lags behind real-time market conditions.
- Appraised value is determined by a licensed appraiser, often for mortgage purposes. This value can differ from market value, as it is a professional opinion rather than a price determined by buyer demand.
- Market value is the price a buyer is willing to pay, and a seller is willing to accept in an open market. This value is driven by real-time factors like supply and demand, economic conditions, and buyer sentiment, making it the most dynamic and fluctuating of the three.
- In most cases, market value is higher than rebuild value, particularly when desirable locations and buyer demand drive prices up. However, this isn’t always the case as the cost of construction and labor can sometimes push rebuild value higher than market value.
What is Rebuild Value?
Rebuild value is the amount it would take to completely rebuild a property from the ground up if it were damaged beyond repair. Rebuild value considers:
- Demolition & Cleanup Costs: If a home is severely damaged, removing debris before rebuilding can be costly.
- Labor & Material Costs: Unlike mass-produced homes in new developments, rebuilding is often done on a one-off basis, which increases costs.
- Inflation: The cost of materials and labor can fluctuate, especially during periods of high demand.
- Catastrophe Surge Pricing: In the aftermath of a disaster, labor and material shortages can drive up rebuild costs significantly.
- Building Code Upgrades: Rebuilding often requires compliance with updated codes, which can add to the overall cost.
How does Rebuild Value Affect Insurance?
The insured value of a home is typically based on rebuild value, not market value. Should a covered total loss occur, the property can be rebuilt without significant financial strain on the owner.
Your client should understand that most standard property insurance policies determine coverage amounts based on a calculated rebuild value, factoring in the location, quality of construction, square footage, and cost of materials and labor. Emphasize to your client that ensuring the policy accurately reflects this rebuild cost helps prevent two major issues:
- Underinsuring: If coverage is too low, they may not receive enough from a claim to fully rebuild after a total loss, leading to significant out-of-pocket expenses.
- Overinsuring: If coverage is too high, they could be paying higher premiums than necessary.
Client Responsibilities
Help your clients understand that securing the right insurance coverage isn’t just about selecting a policy–it requires ongoing attention to ensure their investment remains properly protected. Encourage them to:
- Accurately Report Property Details: Providing up-to-date and precise information about the property’s condition, updates, and occupancy status helps ensure they receive appropriate coverage and claim payouts.
- Review Policies Annually: It’s important for insureds to check that their coverage aligns with their investment strategy, deductible preferences, and any changes that could affect future claims.
- Understand Policy Terms: Clients should be aware of how their policy’s settlement method (Replacement Cost vs. Actual Cash Value) also affects claim payouts.
For more resources to aid in important client discussions, check out our other Client Conversation Guides on key insurance topics.
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