Valuing Your Investment Property For Insurance

Investment Property Safford, AZ

Investment Property Safford, AZValuing of an investment property can be difficult. Add in the idea of a different value for insurance and you have a complicated world.

Demystifying Insurance Valuation

Lessons from Goldilocks

The valuation of any asset can be tricky, and who better to understand that than an investor.

I once approached an owner of a property that I liked.  I had heard through a mutual friend, that he was thinking of selling it and I approached him, hoping to close the deal before he put it on the market. The short of it is, I asked him what he wanted for it. His response illustrates the point I am trying to make. “Well…” he said. “I had it appraised, and as an owner occupied unit it is valued at $121,000. As a Rental Property, it is valued at $185,000.” Okay…truth is, he never did answer my question.

The “market” value of a home is in the eyes of the beholder, and thus the negotiation. Obviously we try to be objective by looking at comparables and the price per square foot.  A home can be appraised, but even that can be subjective (funny how they often come out to the same price as what the seller was asking, right? But I digress). Then you have your finance gurus who talk about valuation models that seek to determine the return, and therefore the value. We hear things like “Cap Rate,” and “Discounted Cash Flow,” that are other ways investors valuate properties.

For insurance purposes we care about one thing and one thing only; indemnifying you. We care about what the replacement cost of the home is. What it is going to cost to get you back to where you started. For investors, this means we are going to get the asset back where it was, producing cash flow. Also, we don’t care how much the land cost. The land will still be there to build upon; we only care what it costs us to start installing the walls, roof, floor coverings, deck, etc. We are looking for the replacement cost.

How do you determine that? It could be through appraisal (minus the land value), or through another expert opinion (i.e. a contractor or real estate agent). It could be through a “Cost Estimator Tool” provided by your insurance agent, or a combination of all these sources. The key is to find an accurate valuation and insure the home for 100% of that amount. Not more and not less.

Why? For a couple of reasons:

  1. This is the amount that the company will pay if there is a loss. You already will be on the hook for a deductible. Let’s not complicate things. Let’s minimize your out of pocket expense.
  2. You don’t want to over insure it, you will pay too much for premium and the company will raise its eye when you insure, your $125,000 property, for a million dollars. They will be inspecting it, and will cancel your policy, if it looks like things are not accurate.
  3. You don’t want to under insure it. First off, the most the company will pay is their “limit of liability” or the value you have on your policy. So if you under insure it, you will have your deductible, plus the difference between the replacement cost and what you insured it for, as your out of pocket expense. Finally, if you get too low on the valuation, you start getting penalties. Usually this kicks in at lower than 80%. Some companies will penalize you by saying that if you insure the home for less than 80% they take the claim to an actual cash value world. Others start reducing the amount they will pay of the claim, by the same percentage that you have underinsured the property.

So, when it comes to valuation, remember Goldilocks and the Three Bears. You don’t want too hot (over insuring the property). You don’t want too cold (underinsuring the property). You want 100% of just right (replacement cost). So do some homework, figure out what the home is worth and insure it just right!

To get an incredible quote these coverage sections start our online quote form. To Talk to a licensed agent about this coverage call us at 1-877-784-6787.

This coverage explanation is for illustration purposes only and is general in nature. Coverage explained here may not apply to your policy, State, company, or situation. For more information about how your policy would respond in the event of a loss, please refer to the terms and conditions and declarations page of your policy.

Additional Coverage for Your Home Insurance

Homeowners Insurance policies, whether for your own home or a rental property, are very specific about what they cover, but oddly enough they throw in a couple of “extras” or additional coverage. What are those? Let’s take a look!

Home insurance Safford, AZADDITIONAL COVERAGE

There’s free stuff in my insurance policy? Yes.

So, great news there are only four Homeowners Insurance Coverage parts, so that part was simple, but next comes the complicated part; additional coverage (s). Yeah! Now for any of you that might be catching the sarcasm in that last comment, there are actually some good things in here. Every policy is different so here are some of the most common and important:

  1. Debris Removal – Have you ever seen a fire? Walls may still be standing but completely destroyed. What knocks those crumbling walls down and hauls them away? Debris Removal! See, good stuff.
  2. Trees, plants, shrubs – Not a lot here, but you can usually get coverage up to $250-$500 or so per tree. Obviously there will be limits, but landscaping can be expensive.
  3. Fire Department Service Charge – Sweet, nice that you don’t have extra stuff, like cost of fire department services coming your way.
  4. Collapse – This is an odd place to have this coverage, but it’s nice that they add it.
  5. Glass – Sweet.

Again, there is more to each of these, but nice that they add them and make them available as additions for your homeowners insurance. Start your quote online or call us for an immediate quote 1-877-784-6787.

Manufactured Home Insurance – Why Is It So Expensive?

Seriously, have you ever compared a manufactured home insurance policy with that of a “stick built” home insurance policy? The cost can be crazy. Why? Insurance rates are based on the expected losses, and in short the expected losses from a manufactured home are higher than a traditional home. Let’s look at a couple of examples.

Fire – So while, there is not more of a likelihood that your manufactured home policy catches on fire and the “stick built” home, the damage a fire would cause is much greater on a manufactured home. Remember, if there is significant damage to a manufactured home, you can’t tear down part of the home and rebuild that part, you are looking at replacing the entire home. So the expected losses increase.

Wind – Most companies that insure manufactured homes will ask if the home is “tied down.” This is a big difference between manufactured homes and stick built homes, the foundation. Because of the relative light weight of a manufactured home, it is more likely to sustain wind damage. Rather than the loss of a few shingles, you could lose the whole roof.

Also, with manufactured homes if there are “attached structures” like “Arizona Rooms,” awnings, carports, etc. these can cause significant damage to a manufactured home. Check out the study and Video American Modern did regarding the effects of High Winds on Manufactured Housing. In fact, there are several large insurance companies that will insure manufactured homes, unless you have an attached structure, once they find out you have one of these, you are no longer “eligible” for their program. Fortunately, we have several partners that offer coverage for manufactured homes with or without attached structures.

There are other examples, the point is the higher the possible losses, the higher the insurance costs. Fair or not, insurance is about the numbers.