When you buy homeowners insurance, one of the most important decisions is choosing a level of coverage that best meets your needs. The chief measure here is the rebuilding cost, which is the estimated cost of rebuilding a house with similar materials after it has been completely destroyed. As the policyholder, it's up to you to choose the so called "dwelling coverage" that best matches your home's replacement cost.
What Does Rebuilding Cost Mean?
Imagine that your home has suffered a major fire incident or an explosion. You would expect your insurance company to pay for the cost of repairing and replacing the damage so that your home looks more or less the same as it did before the fire and so you can live comfortably in your home again. If your house is completely razed to the ground, then the payout should cover the entire cost of clearing the site and rebuilding the home from scratch.
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In the insurance industry, the rebuilding cost is the maximum amount that an insurer would be liable to pay out assuming the home was indeed razed to the ground. It represents the total expense of rebuilding the structure and interior of a property after it has been completely destroyed – the walls, foundations, roof, floors, internal partitions, windows, doors, heating, cooling, plumbing systems, sanitary fittings, built-in fittings, such as kitchens and wardrobes, and supplemental buildings, such as garages.
In simple terms, the rebuilding cost would be everything you need to spend to get the home back into a livable condition. It does not include your own decorative choices, such as carpets or shelving.
Rebuilding Cost Vs. Market Value
The cost of rebuilding a house is not the same as the home's market value. The market value of a home is the amount a purchaser would be willing to pay for the home in its current condition. Lots of factors influence this value, including the home's location, proximity to good schools and local crime statistics.
The significance here is that a home's rebuilding value should be less than your home's market value – but this is not always the case. The market value of your home includes the land it's sitting on and this land will exist even after a fire has burned your building to a shell. So, the value of the land is not included in the rebuilding cost. On the flip side, the rebuilding cost could easily outpace the market value of your home, especially if the home is older and you need to source specialist or custom materials.
Fail to get the rebuilding cost right, and you could find yourself woefully underinsured if you need to file an insurance claim. Suppose you buy a home for $300,000 and take out a homeowner's policy for the same amount. Only the estimated rebuilding cost for the home is $320,000. That means you're going to be $20,000 out of pocket on your insurance claim, assuming the damage is so catastrophic that you need a complete rebuild.
Cost of Rebuilding a House
Figuring out an accurate rebuilding cost can be a challenging exercise. There are three ways to go about it:
- Plug the details into an online rebuilding cost calculator
- Perform a do-it-yourself calculation
- Hire a professional appraiser to run the numbers for you
Let's look at each in turn.
1. Home Replacement Cost Calculator
In most cases, your insurance agent will use proprietary software to calculate the estimated rebuilding cost of your home. The calculator estimates the cost of demolishing the old buildings, clearing the site and rebuilding the property from scratch to the original design, using modern techniques. To check if this number is correct, you can plug information into an online calculator such as Craftsman's National Appraisal Calculator or Dwelling Cost to verify the calculation for you.
While free calculators are available, the more reputable options require a monthly or annual subscription. Look for a free trial to reduce your costs. In each case, you simply enter some basic information about your home (size, age, location, number of beds and baths and so on) to figure the estimated rebuilding value.
2. DIY Rebuilding Cost Calculations
Calculating the rebuilding cost yourself requires a lot of legwork but it's free if you have the time. With this method, you'll need to call local home builders to get an idea of the average building cost per square foot for homes in your area. Multiply that by your home's square footage to get an approximate rebuilding cost for your home.
Average build costs are a factor of materials costs and labor costs. So, they will vary by location. In 2019, the nationwide average build price is between $100 and $155 per square foot. This means you'd be looking at a rebuilding cost in the region of $200,000 to $310,000 for a 2,000 square foot home.
Bear in mind that this type of calculation can only ever be an approximation. It's unlikely that local house builders will be constructing homes that look exactly like yours – especially if your home is older. If you have hardwood floors, bespoke cabinetry, period windows or high-end stonework, then you'll have to contact specialist providers to get a cost for those items as well. Add these extras to your base building cost to get a more realistic rebuilding cost figure.
3. Hire a Professional
It's scary to think that around 60 percent of American homes are underinsured by an average of 20 percent, meaning they could wind up in real financial trouble if the worst happens. By far the best way to avoid this scenario is to hire an independent appraiser to inspect your home and research local market rates for build costs, labor and materials. Appraisers are trained and credentialed, and it's their job to produce a comprehensive report with your home's rebuilding cost, which you can use to determine your insurance coverage.
You'll pay a few hundred dollars for this service, but it's going to give you the most accurate result.
Check Your Policy Regularly
Rebuilding costs can change over time for a number of reasons:
- Inflation will generally push up materials and labor costs each year, which causes the rebuilding cost to rise.
- New building codes can change the way your home is reconstructed, for example by forcing you to use more expensive materials or energy-efficient services. This can push up the price-per-square-foot quite considerably if you ever need to rebuild the property.
- Making improvements to your home, such as installing an $80,000 state-of-the-art kitchen, will also push up the rebuilding cost. You'll need to increase your coverage if you wish to recreate the house of your dreams.
Whatever method you use to calculate your home's rebuilding cost, it makes sense to review the policy annually to make sure it continues to meet your coverage needs.