Home Replacement Value versus Home Market Value

Home market value can fluctuate due to many factors, including:

• Inflation
• Remodeling
  
• The state of the economy.

These factors are not only key determinants in the value of homes, but they also influence home replacement value. For most people, a house is the single largest investment they will make in their lifetime. Making sure that your homeowners insurance coverage is up-to-date will ensure that your home is properly rebuilt following a catastrophe.

While it's essential to have enough homeowners insurance coverage, it's equally important to understand the difference between the two common valuation methods: replacement value and market value.

Replacement Value

This concept is based on replacing or rebuilding a similar property to the insured home that suffered a loss. Insurers will consider many factors in order to arrive at accurate home replacement estimates, such as the current cost of materials, labor, tools and other expenses.

Some insurance policies will only pay for the replacement value, which is subject to the limitations of the policy. Do not confuse the replacement value with the cost the property would have sold for on the open market, which is called the "market value."

Typically, you are responsible for maintaining insurance coverage for approximately 80 percent of the replacement value of your home. Failure to do so can be extremely costly.

Market Value

The fair market value of your home is based on two variables: the highest price that a buyer will pay for your home and the lowest price the seller is willing to accept for the property. The best way for either the buyer or seller to determine a home's market value is to see what similar homes are selling for in the area.

Aside from the location of the home, data from properties that are similar to the subject property are taken into advantage, including each home's:

• Age
• Amenities
• Condition
• Size
• Style.

Market value analyses usually only use comparable properties that have been sold within the last three to four months. However, depending on the market, a shorter time frame may be employed. In addition, comparable properties generally must be in close proximity to the loss address.

All of this data is then compiled in order to determine the market value of the loss address. The market value may be higher, lower or equal to the estimated fair market value. Keep in mind that the market value may not be enough to rebuild your home, especially during periods of economic downturns.