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Understanding replacement cost vs. market value of your home is one of the most common conundrums we hear as agents.  We often get calls similar to: “I got our quote/renewal policy today.  I’m looking at my coverage for our home, and the amount is way too high.  I would never be able to sell it for that much.  Let’s lower it.” Our first and most important response is to explain the difference between the market value and the replacement cost of your home.

  1. Market value:  in the simplest terms, this is how much the property is worth to another buyer based on location, size, current market value, etc.
  2. Replacement cost: the value calculated by the insurance company based on certain variables such as square footage, building materials, etc.

Another very popular question comes across on new homes.  We hear, “I just built this home.  I know how much it had cost to build.  How is the insurance company coming up with a higher amount?”  The key word in this is “replacement.”  A major factor in replacing your home in a covered loss is the clean-up and debris removal.  This generally adds 10-20% depending on the company and location.

Please keep in mind that these are general explanations.  Many, many more factors influence and determine these values.  The best solution is to work with your agent to establish the replacement cost best fit for your home.