By MATTHEW BOYLE
Account Executive
If you've gone through the process of buying a home, you're probably aware of the different values attached to the home you purchased.If you're new to the market, on the other hand, you may not be familiar with these three distinctive terms: appraised value, assessed value and replacement cost.
The distinctions are important, and they explain the sometimes vast differences between the dollar figures associated with each one.
Why three values for a single house? Simply put, the appraised value helps determine the price of a home when it goes on the market, the assessed value determines municipal property tax, and the replacement cost is what it would cost to rebuild a home in the event of a catastrophic loss.Replacement cost is the amount covered by homeowners insurance.
Let's look at each value in greater detail.
Appraised Value: An appraisal can determine the current market value of a home at that specific time.The appraised value takes into consideration both the land value and the home value.Appraisals also take into consideration comparables, or "comps" — the sale price of similar homes recently purchased in the area. Appraisals typically are required by lender institutions to approve mortgages.
Assessed Value: This is determined by the city or town in which the home is located. An assessment takes into consideration the overall quality of the home, the square footage, structural features and market ranges. The municipality may send someone out to the home to physically inspect the property to make sure all of the information on file is correct.
Replacement cost:A common misconception about replacement cost is that it’s determined in part by market value. Not true. Market value takes into consideration land and location in establishing purchase price; replacement cost does not. For example, a 1,000-square-foot house along the coast of Massachusetts or Rhode Island may sell for $500,000, but the replacement cost may only be $250,000. That same house may sell for $200,000 in another area but still be insured for $250,000.
Because the purpose of home insurance is to protect you in case of loss or damage to your home or property, it does not factor in location, land value or market ranges. Replacement cost does includeframing, roofing, exterior walls, partitions, wall coverings, floor coverings, plumbing systems, HVAC systems, electrical systems and attached structures. It may also include debris removal, architect fees, contractor fees and general overhead.
The analytics company CoreLogic goes into greater detail on Market Value vs. Replacement Cost in its Insights Blog.
When insuring your home, your agent will gather as much information as as possible about the dwelling in order to determine an accurate replacement cost, using specially designed software. The software determines the cost based on the specifications entered into the software, and the agent uses that value to determine the Dwelling Coverage for the home.
You can learn more about what is and is not covered in my recent blog post "5 Common Gaps in Homeowners Insurance."
Understanding the differences between the various values associated with a home can help reduce the stress inherent in the homebuying experience.
