In Arizona, residential investors and home-owners always insure for the cost to-rebuild. The vast majority of residential homes are newer, and by insuring for cost to re-build, the owner knows that there is enough insurance coverage to replace the house with a new one if something really bad happens.
The “Parable of the Twins”: Brad and Matt were identical twin brothers. Like many twins, they had a very close relationship. They both had dreamed of having a custom home built that would meet all of their family needs. Together, they had architectural plans drawn up and they hired one home builder to construct identical homes for each of them. The homes were in the same town, but not together, or even in the same neighborhood.
The same materials and the same sub-contractors were used on each home. After they were finished, if you were blindfolded and taken inside of either home, it was virtually impossible to tell which house you were in. Even the paint colors, trim, counters, and cabinets were exactly the same in both houses.
The brothers had negotiated a fair price for the construction with the builder. Since they bought 2 houses, they each paid $400,000 to the contractor for the construction of their house. Since each twin already owned the land, the $400,000 did not include the cost for the lot.
After about 12 years, both brothers decided to sell their homes. The homes were priced fairly and sold within a reasonable time. Brad’s home sold for $850,000. Matt’s home sold for $350,000.
Wait a minute !!! Is there a “typo” there?? Weren’t those identical homes ? No errors. But most people know that the three most important things in real estate are location, location, location. Brad had his home built on a lot that was in a preferred area of town, with great schools and shopping, close to transportation, and away from commercial and industrial areas. Matt paid a lot less than his brother Brad for the land where his home was built. But Matt’s lot was near a gravel pit and in a semi-industrial part of town. Two years after Matt and his family moved in, the gravel pit became a sewage processing facility for the town.
A sophisticated computer program was used to calculate the “re-build” cost for these houses. It was determined that rebuild cost was the same for each house: $700,000. With all of the facts available, you can understand why the two homes sold for different amounts. . . and you can also understand that since they were identical houses, the reconstruction cost was the same for each house.
The lesson here: market value or real estate value, has nothing to do with construction cost. And, when you insure for construction cost, you can always put yourself back where you were before something bad happened.
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by Clark Sanchez
CLARK SANCHEZ has been an Arizona
insurance agent for over 40 years. Also a
Vendor-Affiliate with AZREIA for over 18
years. You can contact Clark if you have
any insurance related questions at