Insurance for Investment properties, Reconstruction cost VS. Builder’s sale price

One common point of disagreement between an insured property owner and his or her insurance company is that of the reconstruction cost of a property being a great deal more than the actual purchase price of a new home that was only recently built. From the customer’s perspective, he or she may have only paid $200,000 for the property, which includes the builder’s construction cost as well as the equity, land and everything else involved, but the insurance company determines that the replacement cost is actually $225,000. The customer often can’t understand why the reconstruction cost for the insurance company is so much more than for the builder and he or she often argues that the property is being over insured.  This is a logical point of view; however, there is a simple explanation.

 

When a tract builder constructs a new home, their cost of construction is far less than that of a custom builder.  The reason for this is simple.  When a tract builder constructs a new home, he or she is usually building a great many more at the same time and in the same subdivision or geographic area.  This means that the builder is often purchasing millions, if not tens of millions of dollars, of supplies and materials in bulk. This allows the builder to obtain huge volume discounts on pricing which greatly reduces his or her construction overhead.  In addition, the builder may use the same labor crews for framing, concrete work, and all other phases of construction.  Because the builder is supplying a steady flow of repeatable work to his subcontractors and these subcontractors are working for extended periods of time in the same areas, the labor rate is also greatly reduced.

 

This is not the case with regard to custom builders.  Rebuilding a property is always more expensive than first-time new construction.

 

If your two-year home that you purchased from the original builder for $200,000 is destroyed in a fire, the contractor or builder that you hire to rebuild the home will not have the same deep discounts on his labor and material costs.  In addition, he will have the added expense of obtaining new blueprints, architectural and permitting fees, debris removal, etc. which the original builder either did not have or which was also greatly reduced.  This means that your $200,000 home may cost more to be completely rebuilt.

 

If you should ever have any questions or would like to discuss in further detail, please feel free to contact me at any time!  Enjoy the rest of your day, everyone!

 

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