Wednesday, October 8, 2014

Navigating the Homeowner's Insurance landscape - What is the difference between Replacement Cost vs Market Value?

Do you know the difference between Replacement Cost and Market Value in your Lake of the Ozarks homeowners insurance policy?  It is interesting how often the topic arises when someone is purchasing a new property or refinancing an existing structure. 

Many people feel they are interchangeable, yet they can be very different amounts.  Replacement Cost is the price to replace property with comparable material and quality.  This is also known as replacing property with “like kind”.  Market Value is the accepted price between buyers and sellers based on supply and demand.


Sometimes the replacement cost and market value of a property are similar to each other, yet here at the Lake of the Ozarks there can be a drastic difference between the two valuations. For example, a home buyer wishes to purchase a 1,500 square foot home that is located on the waterfront at the point overlooking the main channel of the lake.  The purchase price of the home may exceed $500,000; however the insurable value may be closer to a replacement cost of $250,000. 

If the home were to burn to the ground the insurance company would pay to replace the structure, but they would not pay for the cost of the land or the value of the view of the lake.  This can create a dilemma for the lending institution that wishes to cover the interest of their loan which may be 2-3 times the replacement cost value of the home.  In converse there are instances where the replacement cost is much more than what the market values is due to economic circumstances.  This causes its own set of problems.

This topic becomes an even more interesting discussion when you throw into the mix multifamily living units such as condominium associations.  When purchasing a unit in a condo association you are buying much more than a section of a building. You are getting all of the amenities that come with community living.  The total cost to construct a 20 unit condo building may be 3 million dollars.  The market value or selling price of each unit is $250,000.  This does not necessarily make the market value of the building 5 million dollars and it is definitely no reflection of the replacement cost of the structure. 

The market value reflects the additional facilities and advantages associated with community living.  The perks that add to the market value but add nothing the replacement cost of the building may include: use of a swimming pool, parking lot or facility, common grounds, dock, well house, treatment plant, cost of land, the view etc… 

Most Lake of the Ozarks insurance agents have replacement cost guides that allow them to come close to the value of the building; however the best way to come up with the replacement cost of a structure is to discuss it with your local contractor.  Be sure to review your values and limits each year and discuss questions on the claims paying process with your agent.

Delivering all of your Lake of the Ozarks Homeowners Insurance needs - Insure the Lake!

We can help you with all of your homeowner insurance needs. You can have peace of mind.   Contact us for a FREE quote request.

Steve Naught, CIC

3736 Osage Beach Parkway
Osage Beach, MO 65065
Next to Golden Coral

T: 573-348-2794
F: 573-348-0191
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