The value of understanding appraised value, market value & insurance value
If you matched your property’s insured value to today’s real estate value, you will be underinsured. If you matched your insured value to real estate value before the housing bubble burst, you would have been overinsured. Yes, it’s really that simple. And yet…..people are confused by the difference between appraised value, insured value and real estate value. The wider the gap between those three numbers the greater the confusion. So, let’s start at the beginning.
Assessed Value: This is the value placed on the property by a county tax appraiser for taxation purposes. It remains fairly stable – unlike real estate value. Tax assessors are not required to adjust assessed value of properties to reflect market value. The Florida Department of Revenue has information on how to calculate property taxes.
Real Estate Value: This is the market value and is defined as the price a house will sell for within a reasonable time. It is the agreed-upon price between a willing and informed buyer and a willing, informed seller, the highest probable price the property will sell for in the current marketplace. A home’s market value reflects more factors than the property tax value, such as what comparable homes are selling for and the condition of the neighborhood. This value can fluctuate dramatically. (Yes, an understatement.)
Insured Value: This is set most often by computer valuation models. And, in this time of depressed real estate value, the insured value is higher than either the assessed or real estate values. The insured value is based on what it would cost to rebuild your home and replace its contents if it were to be destroyed by catastrophes such as a fire, hurricane or tornado. Here is information on insuring to reconstruction costs.
You’ve likely been reading news reports featuring people who say things like, “I can’t sell my home for what they want me to insure it for, and that makes the insurance number wrong” – and some of those people are politicians and so-called consumer groups who (should) know better. Real estate value has NOTHING to do with insured value. When real estate was selling for peak prices, homeowners wanted to have their insurance match that high amount. Insurers did not do that back then because you could rebuild a home for far less than many of them were selling for, unlike today.
Something else that concerns me: You’ve likely read that building contractors are questioning the computer valuation numbers and saying they could rebuild a home for much less. Whoa! Of course they’d say that! Someone who is looking for work now, when construction jobs are scarce, will price a project to get the work and maybe cut the profit margin. But you have to wonder how many contractors can afford to stick with a low-ball estimate once work gets underway. And, homeowners don’t know that someone who specializes in new construction is not necessarily an expert on RECONSTRUCTION. Reconstructing a home can cost more because it is similar to custom building in that rework has to match what may be still existing.
Another point is that the insured value includes the cost of debris removal which the contractor typically does not factor in.