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Home Reconstruction Cost in the Event of a Loss
One debate often encountered when writing a homeowner policy for a new client is, "What replacement cost value should be put on the structure of the house"
An insurance company has one goal in the event of a loss: to return the insured to the position they enjoyed before the loss. This is the classic definition of the purpose of insurance.
Regarding a structure, the cost to replace rarely has anything to do with taxable value or fair market value. This is because reconstruction cost is based on the going rate for labor and materials, contrary to the the other value estimates. There is an old saying in real estate..... "location, location, location". That is certainly true in real estate market valuations. The market value of a particular structure can vary hugely depending on what area it is located within and that area's amenities.
But with regard to reconstruction cost,both labor and materials are impacted by demographic boundaries less so than market values.
Also, keep in mind that if one unfortunately suffer a loss, their original builder will most likely not be the company to rebuild the house, they will not receive any discounted incentives or add-ons from their custom rebuilder, and they will pay going rates for labor and materials instead of discounted rates passed on by builders who may be building several units in a new community.
The neighbor of one of our long time clients was unfortunate enough to lose her home to a fire, in late 2006. The house in question was a 3125 square feet two story of above average, mid 1980s finish out. That means the finish out was very nice, but not on par with some of the upscale homes we see now.... no granite counter tops, no media room, limited tile/hardwood, etc.
As can be seen from our client's note, below, if the house had been rebuilt from the slab up, it's replacement cost would have been in the $110/square foot range. It is true that some upscale features were included in this reconstruction estimate, but still not to the extent of the "super" custom homes we sometimes see today. We have not seen or heard of a total reconstruction for any area homes being priced at less than $90/square foot for several years.
Keep in mind that a really hot fire can crack a slab, possibly damaging the plumbing below. It's recommended to never rebuild a house over a slab which has been cracked due to a fire, and a builder should never agree to rebuild of one which has been damaged so.
Also keep in mind that the cost to remove the old debris, including the slab if required, is included in the insurance coverage on the structure. Texas insurance guidelines, as promulgated by the Texas Department of Insurance, specifies the structure coverage as the source of funding for debris removal. So in figuring replacement cost on the structure, one always has to consider debris removal.
It is quite likely that in the situation noted below, that the full replacement cost of the house, including slab, could have easily approached $120/square foot. Many do not realize the impact that the growth in North Texas has had on residential labor and materials cost.
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