Insuring your building for the correct amount.    

Number One – Remember that insurance is for the cost to re-build or repair the property you own.  It is NOT real estate value or ‘Market Value.’  The selling price of a property is significantly influenced by such things as schools, low crime statistics, convenience to shopping or transportation, and even noise levels… such as nearby airports or freeways or busy streets.

None of these factors impacts the cost of construction. So, while the current market value is always good to know, it really has nothing to do with the construction cost of your home.

Number Two – Some investors look at the cost of new construction in their area and calculate the selling price per square foot.  They then use this to estimate re-build cost for their investment properties.  This is another big mistake.

Developers benefit from many aspects of “economies of scale.” They build multiple properties in a very concentrated area. Their construction crews simply move up and down the street from property to property. Equipment and supplies are delivered to one concentrated area, and the trades who work on the project, do not have to be at the very top of their profession. Once they become familiar with a few floor plans, they will repeat that model many times at that development. In addition, large builders get the very lowest prices for lumber, roofing, plumbing, wiring, and HVAC because they buy so much.

Even when your investment property is a ‘tract home’ with a floor plan that is repeated many times in that neighborhood, an insurance repair or re-build is more like ‘custom-home’ construction. It is in an isolated location and it is the only property like that which is being worked on. There are no ‘economies of scale’ and the fact is, frequently the insurance company actually has to pay an extra incentive, just to get a contractor interested in doing a one site repair or re-build.

Number Three – So how much should I allow for my building?  In Maricopa County and throughout many other areas in Arizona, we often say that $130 per square foot is the starting point for a true ‘economy’ single family house.  But that really does mean economy!  We’re talking no garage, no dishwasher, no garbage disposal, no covered patio, no tile roof, only one bathroom, and usually 2 or 3 very small bedrooms. Some of these homes may have been upgraded to air conditioning, but most will be evaporative cooling only. In contrast, a more typical rental home will cost between $140 and $170 per square foot to re-build. And obviously, high end homes that are not the typical investor property, but which sometimes go onto the rental market, can cost $200 a square foot and up.

Number Four – As I have said before, beware the insurance agency that suggests a low amount for your structure. Some simply don’t know any better, but there are others that might intentionally recommend a lower amount of coverage just to bring their price quote down. They know their rates are high, so they quote a lower amount of building coverage to appear competitive.

* * * * * * CLARK SANCHEZ has been an Arizona insurance agent for over 39 years and has been a Vendor-Affiliate with AZREIA for over 16 years.  You can contact Clark if you have any insurance related questions at clark@clarksanchez.com or (602) 803-2179