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"Our mission is to create peace of mind and build enduring relationships."

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Friday, August 15, 2014

New Construction Versus Replacement Costs

 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

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