LUXURY HOMES / HIGH-NET WORTH RISK
REPLACEMENT COST
After a property loss, the owner doesn’t have the luxury of time to bid the project and the economy of scale is lost.
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It is often easier to build new from scratch rather than to rebuild on an existing foundation or structure.Often more skilled artisans are needed compared to new building construction.
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Reconstruction contractors often need to deal with obstructions that were not present when the home was first built, such as trees, other surrounding homes now existing, power lines, etc.
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Understanding Replacement Cost
What is Replacement Cost?
The term replacement cost refers to the cost of reconstructing the unique features of your luxury home in today’s marketplace using materials and design of like and kind quality.
Why not insure your home for its market value?
The market value of your home is influenced by non-construction factors such as land, school districts, police and fire departments, surrounding homes, landscaping, the economy, etc.The amount of insurance you purchase should reflect the cost necessary to completely rebuild your home as it exists today.
How is Replacement Cost calculated?
If your insurance carrier has never been to your home to provide a complimentary appraisal on what it would cost to rebuild your home today, how can they know about any unique architectural features and characteristics your luxury home may have?Replacement cost valuation is developed by specialists using detailed material costs along with their knowledge of local conditions and of one-of-a-kind features.In addition to the cost of materials, valuations include fees to employ architects, local contractors, home accessibility, age, scale, and architectural complexity.It does not include the value of the land, any detached structures, or the cost to remove debris after a loss.
Why does Replacement Cost always soar above original cost to build?
Demolition and Debris Removal.These costs can be considerable and are not incurred during new construction.
- After a property loss, the owner doesn’t have the luxury of time to bid the project and the economy of scale is lost.
- Building codes continue to get stricter.Even for small losses the owner must adhere to the new ordinances before work can begin on the loss.
- Older homes often have expensive features or materials not commonly found in homes today.
- Reconstruction contractors often need to deal with obstructions that were not present when the home was first built, such as trees, other surrounding homes now existing, power lines, etc.
- It is often easier to build new from scratch rather than to rebuild on an existing foundation or structure.Often more skilled artisans are needed compared to new building construction.
- The full impact of hurricanes Katrina and Wilma on building materials.Initial repairs and rebuilding from the 2004 storms have depleted stockpiles of certain materials.
- China started building 3 major cities in anticipation of the Olympics they hosted.
Cost of building materials, particularly lumber, plywood, drywall and cement have skyrocketed the past 2 years
- In 2003, plywood cost $8 a sheet
- In August 2005 before Katrina struck, just under $10 a sheet
- Post Katrina, $15 a sheet
- The U.S. Forest Service estimates up to 19 million board feet of timber were blown down by Katrina.Enough to build 800,000 single family homes, but only 20% could be salvaged.
- 60% of the country’s refining capacity is located in the Gulf Region and hurricane Katrina has impeded production.Damage to natural gas facilities dramatically impacts the manufacturer of materials that rely on natural gas for drying, such as sheetrock.
- Petroleum shortages impact the production and price of pipes, asphalt, shingles, insulation, etc.
- Limited access to the Port of New Orleans, the top import destination for cement, could lead to supply problems.
- Overall Impact:Recent reports indicate a 25% jump in materials; 15% increase in labor; a 10% increase for equipment will cumulatively drive up building cost by an estimated 20%.
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