reinstatement for insurance

MRSTITTLEMOUSE

Just had survey form back,it states present market value for mortgage purposes £145,000 ,estimated cost of reinstatement for insurance purposes £170,000.What I can't understand is what this means and am I paying too little or too much for he property.We are paying £145,000 by the way.This is all a foreign language to me.Thanks in advance.

BobProperty

The re-instatement value is the total re-build cost needed for buildings insurance purposes. It has nothing to do with the market value.

dander

are you saying the survey suggests that the rebuild cost is more than the market value? It should surely be less. My rebuild cost is about 60% of my market value.

silvercar

I doubt you could insure it for more than its worth, if it burnt completely to the ground the insurance wouldn't pay more than its market value.

Debt_Free_Chick

silvercar wrote:

I doubt you could insure it for more than its worth, if it burnt completely to the ground the insurance wouldn't pay more than its market value.

I'm not sure that's right - but prepared to be corrected

If the house burned to the ground, then the insurance should pay out the cost of rebuilding it. Sometimes, this can be more than what the house would sell for.

The market value (selling price) of a house bears no resemblance to the price you would get if you sold it. Bizarre, but true. To rebuild a house you need the cost of all the materials plus the cost of the labour.

Anyone any other thoughts?

Doozergirl

Re-instatement would generally be less than the property value, though an old building, especially a listed building, could cost more. I suppose a big house in a 'cheap' area (wherever 'cheap' is!) could have a higher rebuild cost too.

I'd check with the surveyor that their figure is correct - you don't want to pay a higher premium than you need to!

Ian_W

The valuation for insurance also includes the cost of clearing the site so rebuilding can tale place. Although as Doozer says in my experience it's usually below the market value the two are not related, so there is no way has to be more or less than market value. And yes, insurers will pay more than market value if you have the cover and that's what it costs to rebuild.

There's a page from the Association of British Insurers here:
http://abi.bcis.co.uk/
which has a calculator to help establish a valuation for insurance purposes.

MRSTITTLEMOUSE

The house does need work and is reflected in the cost about 15k, could this be the reason?

BobProperty

MRSTITTLEMOUSE wrote:

The house does need work and is reflected in the cost about 15k, could this be the reason?

My orignal comment still holds: there is no connection.
I have owned property where the rebuild was larger than the market value (e.g. Moss Side, Manchester) and where the reverse was true (e.g. large edwardian terrace / large late Victorian semi in upmarket areas).

courtjester

dander wrote:

are you saying the survey suggests that the rebuild cost is more than the market value? It should surely be less. My rebuild cost is about 60% of my market value.

These are two very different valuation indicators - the difference being due to the different purposes of each.

Reinstatement (or rebuild) means just that - what it will cost to rebuild that property to that specification in that area.

Market Valuation is like fashion and is dependent on many things unrelated to the property itself.

For example take a standard 1000 sq ft modern house and build it in Northampton. Take the exact same house and build it in central London - ignoring the value of the plot of land, the build cost (or rebuild cost) will be similar.

However the selling value (or market value) is almost entirely dependent on the location - the London property will probably have a value double or more the selling value of the Northampton property, although if both burnt to the ground, the cost to rebuild would be similar, ignoring London premiums.

So there is no real relationship between market value and rebuild value and for some properties one will be above the other and for other properties the reverse.

Modern house builds often have a market value above the rebuild cost when first sold. Like a new car, this depreciates almost immediately so that rebuild cost probably exceeds market value. After a few years depending on the local market , this situation will reverse and it is common for modern homes to have market values well above rebuild costs.

The complete reverse is generally the case for older or more architectural properties - Victorian homes often cost far more to rebuild than a modern property because of the details, features and materials involved. However, their market value is commonly lower.

So [generally] for an older property, you might expect to insure (the rebuild cost) for far more than the market value. For modern property, you might expect to insure (the rebuild cost) for less than the market value, but there is some argument for (over-) insuring at the market value instead of the rebuild value to cater for some exceptional situations,where standard rebuild (or repair) value may not be enough.

An example would be where complicated subsidence repairs may exceed the market value of the property and be deemed uneconomic to carry out, in comparison with merely selling up and taking the difference in insurance compensation.

mistyarthur

I always thought you were supposed to insure a house for quite a bit over because when you are talking about your house the difference in cost is negligable for the extra cover and you are covered in the event of expensive problems like subsidence. Your better of paying x amount extra a year then finding out when you come home to a smouldering pile of ashes that your insurance is £30k under the rebuild cost so you have to get somewhere cheaper.