Wednesday, February 27, 2008

Why does replacement cost soar about market value?

Here are 8 reasons why replacement costs always soar above market value, from an insurance viewpoint:

1). Soaring Cost of Building Materials--The cost of building materials--particularly lumber, plywood, drywall and cement--have skyrocketed the past two years. They generally outstrip inflation.

2). Skewed Supply and Demand After Natural Disaster--After a widespread storm or disaster, there is often a shortage of contractors relative to demand, driving costs higher than normal.

3). Low Economies of Scale--After a property loss, the owner doesn't have the luxury of time to bid the project, allow schedule delays, etc. Also, often new houses are built as one of many and that economy of scale is lost.

4). Demolition and Debris Removal--These costs can be considerable and are not incurred during new construction. Nor are they considered in the market price of existing homes.

5). Changes in Building Ordinances--Building codes continue to get stricter. For total, or near total, losses the owner must adhere to the new ordinances.

6). Obstructed Access to Worksite--With new construction, it is usually very easy to access the site. With reconstruction, contractors often need to deal with obstructions such as trees.

7). Special Features and Unusual Materials--Older homes often have expensive features or materials not commonly found in homes today.

8). Cost of Reconstruction Higher than Building New--It is often much easier to build new from scratch rather than to rebuild on an existing foundation or structure.

Reprinted by permission from Debi Butler, Tucker Insurance.

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