Why do Building Cover insurance calculators include the land component in their estimations?
Would you like to explain further or provide an example.
It’s likely some of us may not fully understand the issue raised.
Thank you yes. We bought our home for about $700K. About 45% of that costs was the cost of the land. The current market price of the land is $800K so if one accepts that the land cost is still around 45% then the land costs is about $320K. The standard insurance calculator (Cordell Sum Sure calculator) determines the costs of rebuilding the house at $900K. If one still accepts the land cost is $320K then the overall market value is then $1.2million. We have not made any major structural alterations to the house. How is that possible? I understand that there will be architect, demolition and some other costs but it almost seems that the calculator just determines the market value of land and building and goes with that.
Well I see no reason why the land valuation would be included in the cost to replace a building. And I doubt it is.
I think you are doing some calculations and coming to the wrong conclusions.
Thanks Gregr, I do see a reason. If we put put the cost determined by the calculator as the insured value without thinking then the insurance companies will get higher premiums than is necessary - and we will be over-insured. I hope I am totally wrong but without being able to understand the calculations and have an assurance that land is not included from the industry do we just accept it? Guess we will just have to get a valuation from a professional valuer to determine this accurately and allay our fears.
It is tricky to try and work how much to insure your home for, I agree.
But estimating calculators for rebuild will generally factor in land issues like slope, location, access, but not what you may have paid for the land as a vacant block, or what council rates it as for fees.
I just insure my house for total replacement, like for like.
Thanks Gregr, so in the example above would you insure it for 55% of the original value ($700K) or 55% of the current market value ($800K)? And thanks, I really do appreciate your comments.
Note that members are not licensed and thus not able to offer personal financial advice.
As a general statement the cost to totally replace a house does not include land as @gregr noted, but does include costs to demolish and remove ruins; and policy dependent may include limited grounds features such as fences or sheds. Further, market value does not reflect rebuilding costs. Some properties could be more valuable as empty lots and others with houses on them. In my outer metro area a house that cost a bit under $200,000 to build 25 years ago would cost about $1 million to rebuild today from the Corelogic estimator, as a total loss, that seems to reflect costs close enough, if that assists your decision making.
I would not use that methodology at all of using a percentage of market value of your improved property, which is land plus building(s) on the land.
Good building estimators should include all the relevent up to date data about what it should cost to build a generic type of house with a list of features and size on a type of block in a certain location. And factor in costs to clear the land back to prebuild condition and costly new design features needed for changed conditions after things like bushfires, floods, coastal errosion, labour shortages due to demand, and others.
Thank guys, much appreciated. I still think we are being had, but that’s just my opinion. I cannot understand how the cost to rebuild a house can be more than its current market value including the land cost. It just doesn’t make sense. Perhaps I’ve just lost my trust in the insurance industry.
Market prices fluctuate down as well as up, but the focus for your question is really to the cost of demolishing a total loss, removing the debris, obtaining the permits and clearances required to rebuild, and that insurance also provides for alternative accommodation for some period, often a year or more, and all that can be very expensive. As @gregr indicated there may also be external issues regarding flood plains, bush fire areas, and so on that require a rebuild to be of a higher standard than the original.
If you try to understand how insurance premiums are worked out, you risk suffering a stroke. If you try to work out property prices for established properties versus cost to build a house on vacant land you risk a complete brain explosion.
Just let the insurance companies work it all out and shop around for a good policy.
So the bottom line is trust the insurance companies without question.
I recall that being said before the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, also known as the Banking Royal Commission." And we know how that trust was repaid… Enough said - thanks anyway!
That is not what is suggested and apologies if we were having multiple discussions, not just one. We attempted to provide insight into why the insured value may seem high.
The estimators take ’ all the related rebuilding things’ into account, not the market value of a property, which is the key point. Once one have a value for a total rebuild then one can get quotes. The estimators generally are similar to each other. A neighbour recently built a house so I am conversant with the costs, and as I stated, the value from the estimator for my house seems reasonable in comparison.
Perhaps you may be more comfortable consulting a broker to go through all of the potential issues. I hope you find an appropriate policy for your needs.
Your land value is usually written on your Rates Notice as councils usually calculate your rates as a cents in the dollar amount. If you don’t have a Rates Notice, then contacting your State’s Valuation Department (Lands, Natural Resources, etc) might help. I realise that there will have been movement in recent years due to rising house prices and flooding, but these are done every few years.
I did the exercise to replace the house given current requirements, current building material prices etc. A simple one was through the insurer’s basic calculator - level block, 3 standard bed, 2 bath etc. The other was an exercise I did myself in more detail - it will give you a shock. What was OK 50 years ago is now more regulated (environmental, pest, weather etc) and our expectations are higher - ensuites, tech, kitchen, insulation, air-con etc. Then there are sheds, garages, garden etc We recently increased our insured amount in the light of these and rising materials costs.