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Valuing Your Investment Property for Insurance

 

Finding the value of a home can be a balancing actValuing 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.

Start My Rental Investment Insurance Quote

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.

Gila Insurance Group LLC

805 W Court St. S
Safford, AZ 85546

Toll Free - (877) 784-6787
Local - (928) 428-6440
Fax - (888) 634-6384


About Gila Insurance Group

Customers choose Gila Insurance Group LLC as their insurance agent because they like being able to fill out one application online and then getting multiple quote from highly rated companies. They like the friendly staff that takes the time to help them understand what they are purchasing. They like that the staff is trying to get the best coverage for them at an affordable price, and they LOVE that once they are customers Gila Insurance Group monitors their rates. If rates start to get out of hand they love that they have someone looking out for them to see if they can find a better option!

While Gila Insurance Group LLC serves Safford, Thatcher, Pima and all of Southern Arizona, they are also licensed in 32 states and serve clients from all over Arizona, California and this great Nation. Gila offers a variety of products including auto, home, RV, and business insurance. However, Gila has several specialties which include insuring investment properties such as rental properties, and fix and flip projects and Manufactured and Mobile homes.