Insurance Appraisals vs City Assessments: what is the difference?

For many property owners and real estate investors, deciding on the correct amount of insurance to place on their real estate assets can be a difficult task. The total value of the insurance policy needs to be able to cover the full cost of a rebuild in the event of a loss of course, but as an astute investor, one needs to ensure that the premiums paid aren’t based on an over inflated valuation of their property.

Many owners rely on the assessed values provided by their city or town for their insurance values and this can lead directly to the aforementioned over inflation. Assessment valuations are derived from the calculation of: land value + building construction cost + market speculation – depreciation factors, so from this equation, we can see that three out of the four factors have nothing to do with actual reconstruction costs. When assessments, and similarly market value appraisals are relied upon for insurance values, it becomes easy to see how this can lead to an over insurance situation.

An insurance appraisal on the other hand, is the best way to ensure that the level of insurance is accurate and that you’re not paying too much in premiums. Let me explain further. An insurance appraisal is based on the following calculations: Reconstruction cost of the building + reconstruction cost of site improvements (landscaping) + the cost of demolition and debris removal. These are the three main components of a professional insurance appraisal and the three that are required to ensure that you have a complete report of the cost to reconstruct your property.

Breaking down these three components further, the reconstruction cost of the building takes into consideration construction material costs, labour costs, building/ fire codes, bylaws, architectural fees, developer overhead and profit, plus soft costs such as permits/ inspection etc. Secondly, the site improvements take into consideration roadways, fences, sidewalks, exterior lighting etc, plus soft landscaping items such as grass, trees and shrubs. Lastly, the cost for demolition and debris removal is a very important inclusion in the valuation, as this is often the very first amount to be taken out of a policy when there is a claim.

More than ever amidst today’s rising insurance costs, it becomes necessary to make sure you have an accurate valuation on your property, as today’s inaccuracies are only compounded over future years. An example of this is from a project I worked on last year. An investor had bought a six-plex apartment building five years ago and had been incorrectly insuring the property for the sum of the market values of all the units. This added up to $1.75 million, so that’s what he insured for. It came as quite a surprise then when he received the insurance appraisal which valued the property at $1.25 million to reconstruct it completely. Unnecessarily, he had been paying an additional $500,000 in premium per annum over a period of five years, which certainly impacted this investor’s return on investment.

The relatively small cost of an insurance appraisal was a fraction of what this investor was paying out in excess premiums, therefore very worthwhile to have performed. With an annual valuation update service also available, a property owner can be confident that their year to year insurance costs are never exceeding what they should be.

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