New Construction Versus Replacement Costs
If
a homeowner just purchased a newly built home, the replacement cost for
that home should be the same as the purchase price, right? The answer
is actually, “No. It is not usually the same cost.”
We
hear this question quite a bit. It might sound
reasonable to assume that these two costs are the same. However
replacement cost is usually higher than new home construction, even
right after the home has been completed, and here are a few of the
reasons why.
Replacement
Cost is what it will cost to rebuild the home with materials of like or
similar quality, in the shortest amount of time and with a builder who
is basically building the home as a custom-built house. Since only one
home is being built there are no economies of scale that help to reduce
the expenses for the builder. That means an increased cost to the
homeowner for rebuilding the home over similar homes that are built as
part of a development.
Since
there is time pressure to rebuild quickly, the builder may not be able
to time the purchase of supplies and materials for better pricing. Since
there is time pressure, the insurance carrier may not be able to wait
for a less expensive builder—they may need to select whoever is
available.
Another
factor that increases rebuilding costs over new construction is that
builders that build developments may not do custom homes. These are
often separate groups of builders. There would be pressure to rebuild
and the choice of custom home builders available at the time that the
home needed to be rebuilt might be limited.
Depending
upon the home’s features, the rebuilding cost could be an additional
10-30% or more even immediately after it has been completed. In some
cases the home might go under contract months before it is actually
built. By the time it is completed, costs have risen and the same home
could not be built again for the same cost. We include cost data in
every newsletter to help show trends and keep our customers informed
about cost changes.
In
some cases the new home builder owns the land and makes a profit on the
sale of the land to the homeowner. That profit is calculated into the
sale of the new home. Replacement home builders do not profit from the
land sale since this is not part of the rebuild. Therefore their profit
from the rebuilding of the home may need to be higher.
Were
all costs included in the purchase price of the house or were they
listed separately? These might include builder overhead, architect fees,
upgrades to the house, and additional areas: garages, decks, porches,
etc. Our replacement cost includes these costs and any additional areas
that the user has included in the home’s description.
Contact us for all your Insurance needs! (321)725-1620
Bob Lancaster Insurance
Serving Florida since 1964