Benefits and Needs of Replacement Cost Valuation
As a property owner, business owner or property manager, you were wise enough to purchase insurance to protect your assets, including your buildings, site and common area improvements. Yet, do you really know their current replacement values? Are you currently under-insured or over-insured? Where did the value come from and how old is the replacement cost estimate?
How much will your insurance company compensate you if your property is damaged or destroyed? If you think it’s the same as its appraised or actual cash value, that isn’t always the case.
An insurance appraisal (or replacement cost valuation) can help shed light on the actual payout you can expect in the event that you’re forced to rebuild or replace parts of your structure(s).
While there are exceptions, most insurance providers will require that you actually replace the items before you can collect your full settlement. Would doing so set your business back significantly?
When you schedule an insurance replacement appraisal, also called a replacement cost valuation, you’ll have an accurate estimate of how much insurance money it will take to replace each structure or asset.
Our clients know the value of MAI appraisals. We are sharing why a Replacement Cost Valuation (RCV) is so important and the insights you’ll gain when you schedule one.
What is Replacement Value?
Replacement cost value refers to the cost of replacing your property if it were destroyed.
An important distinction is that this is the cost to replace the structure at its pre-loss condition. In other words, how much money would you need to restore the property to its initial, prime state?
It differs from appraised value because, replacement value doesn’t consider the value of the land on which your property stands. Most insurance providers will include the formula they use to calculate this value in the valuation clause of your policy document. Our documented valuation will assist you with insurance buying and coverage decisions.
Replacement Values vs. Maximum Limits
Most people believe that the numbers they see on their insurance declaration page, or “DEC page”, indicate how much money they’ll receive if they file a claim.
While it’s easy to see how you could make this assumption, it isn’t true. It’s important to understand that this is the maximum you could receive. You aren’t guaranteed this amount.
Instead, replacement values provide you with a more accurate view of what you’ll receive in a successful claim.
Replacement Value vs. Actual Cash Value
Contrary to replacement value, actual cash value (ACV) describes how much a depreciated item is worth at the time of its loss. If you receive this type of settlement for your business or commercial asset, it’s unlikely that you’ll be able to replace what you lost in full.
Instead, the amount you receive via ACV is akin to what you’d get for the lost item at a yard sale or auction. It’s discounted, taking into account the wear and tear that time can take on an asset. In other words, you won’t be able to replace a new item similar to the one you lost, at least not without footing some of the bill yourself.
How does this affect residential and commercial properties in Texas?
In Texas and the Gulf Coast region, it’s common for adverse weather conditions to wreak havoc on even the sturdiest buildings and commercial properties. If heavy winds or floods compromise or destroy your property, you need access to funds that can restore them back to their prior condition. With an ACV settlement, you might not have enough money to do so.
While the land will appreciate, buildings themselves depreciate. That means you’ll likely be looking at a payout that doesn’t match what you need to rebuild.
Replacing assets or entire properties based on an ACV or depreciated basis is risky, as it can leave you at a loss. On the other hand, replacement cost settlements can help you recoup what you lost in full.
Why have an Insurance Replacement Appraisal done?
You can hop online or check at a local store to get a general idea of what you’ll pay to replace a small, inexpensive asset. However, do you know how much money it would take to replace your most valuable assets, including entire commercial buildings?
The best part? You’ll be able to replace the property with like-kind improvements to restore it to its pre-loss condition. There’s no consideration of depreciation.
Our team has the skills and software in place to conduct replacement cost valuations on the following types of properties:
- Industrial Facilities
- Retail Centers
- Apartment Complexes
- Condominium Complexes
- Office Buildings
- Convenience Stores
- Hotels and Motels
- Mixed-use Developments
- Special Purpose Properties
Benefits of Replacement Cost Value Appraisal
In addition to making sure you’re choosing the right amount of insurance coverage, this kind of appraisal can also help you:
- Make sure that your property is not under-insured
- Potentially save money on your premiums by avoiding overstated values.
- Make sure your insurance company indemnifies or reimburses you properly for your property loss.
- The insurer gets confidence in the validity of values of the assets to be insured which can help the owner negotiate the best coverage.
- In addition to us providing an accurate value for your building, you can then request from your insurance company an additional value added item – an agreed amount endorsement. This means they accept your value and cannot say that you don’t qualify for the co-insurance clause.
Discover Your Replacement Cost Values Today
Insurance is necessary for any successful real estate investment, but it can be a challenge to navigate.
This is especially the case if you’re signing your policy blindly, without knowing if the numbers you’re agreeing to match the actual replacement values of the commercial real estate that you’re protecting. That’s where we come in.
We’re industry professionals skilled in providing insurable replacement valuations. Our independent commercial real estate valuation and consultation services can help you accurately estimate replacement costs to meet your exact needs.
Contact us today to learn more about what we do. Call our offices at 877-223-2342.