Market Value vs. Replacement Cost

Market Value vs. Replacement Cost
November 6, 2020

One of the biggest misconceptions is that market value and replacement cost is the same. They are not the same and are estimated using different criteria & approaches to property valuation.

Market value is the estimated price of a property in the open market, using comparisons in the market with similar recent sales properties. It is an agreement of a price between a buyer and a seller of the property in the current condition, which often includes land value, site improvements to land, intangible assets, and sometimes personal property. It is influenced by location, schools, crime, etc. much beyond just material and labor costs.

Replacement cost is the construction cost to repair or rebuild the structure with current materials at current labor prices. Also, replacement cost includes permits, built-ins, demolition, debris removal, etc. but does not include the value of land, landscaping, walkways, driveways, well & septic systems, and other land improvements.

Although both are different concepts, both are impacted by economic changes. Replacement costs should be reviewed with the customer at each renewal. This practice ensures the customer is adequately covered in case of a claim, especially if any updates or additions have been made with rising material, labor, and transportation costs. It is important to be insured to value and also include the inflation clause. Market value does not deal with any part of the rebuilding process as replacement cost does. Even when there is a partial loss, it is important the building needs to be insured to value to avoid any penalty at the time of a possible loss. Occasionally, the market value can be higher than the replacement cost of one property. Still, it is vital to insure the structure to full replacement cost when the market value is a lot lower as the market value limit will not be enough to rebuild its previous condition.

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