With the cost approach, the value of a property can be estimated by determining the cost to build an equivalent structure. In this scenario, the market value of the property is is equal to the cost of land plus cost of construction, less depreciation. This approach is the most accurate when the property is relatively new. There are two different ways to go about the cost approach: the reproduction method or the replacement method. With the reproduction method, you base the value on rebuilding with the exact same materials. With the replacement method, you base the value on rebuilding with the use of newer materials, current construction techniques and an updated design. Most residential appraisals do not use this approach. However, the cost approach is commonly used with properties such as libraries, schools or churches, where they generate little income and they're not often marketed, so the income and comparable approaches aren't valid.
The income approach is an appraisal method that allows investors to estimate the value of a property by taking the net operating income of the rent collected an dividing it by the capitalization rate. Capitalization rate is the rate of return on an investment property based on the income the property is expected to generate. Investors will estimate this rate based on comparable properties in the area and how much income they generate. This approach is most commonly used on investment property, in which income is generated. When using this approach an investor must also take into consideration the condition of the property.
The comparables approach is where the value of a property is estimated based on the price of a recently sold, similar property. This technique is often used to determine the initial sales price of a property going on the market. It is also helpful in accurately appraising the value of an asset.
The above approaches are used to determine market value for real estate purposes. When it comes to insuring your property, you want to take into consideration more than just the current market value. Depending on the market, your home or business could often sell for much more or much less than what it would cost to replace it. In times of disaster, it won't matter what your property could have sold for, it will only matter how much it's going to cost to rebuild and get you back to where you were before. Therefore, its important that you understand that one property can have several different "values" and those differences affect how much insurance coverage you really need to be protected.
As your Lake of the Ozarks insurance agent, I am here to help you understand property value and how it affects your insurance coverage. This could include Replacement Cost, Actual Cash Value, Functional Value or an Agreed Amount. Together we will discuss your needs and find the perfect plan for you at the best value! Give Insure the Lake a call at 573-348-2794.
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About the Author: Steve is a double back-flip insurance ninja. He was named Young Insurance Agent of the Year by the Missouri Association of Insurance Agents in 2010 and is a Certified Insurance Counselor. When he is not helping customers, he enjoys community service, Latin dancing with his beautiful wife and going on adventures with his two awesome sons.
Steve Naught, CIC
3736 Osage Beach Parkway
Osage Beach, MO 65065
Next to Golden Coral
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