Builder vs. Appraiser – why most Builders and Developers underestimate Reconstruction Cost

In CAM Library, Commercial Market, Construction, Florida Hurricane Insurance, Insurance Appraisal by Patricia Staebler

Once in a while when I am asked to appraise the insurable value for a condominium association, the board is greatly upset over the values my appraisal work revealed.

The first course of business for most of the board members is to ask their developer or the next best contractor: “Listen, Buddy, if you have to rebuild by property, what would it cost?”

The answer in most cases is way below the valuation I delivered to the association. And with that, the discussions start.

For an insurance replacement valuation, the appraiser has to follow certain guidelines set by most insurance companies, foremost of which is Citizens in Florida. Developers do not know these guidelines and therefore cannot include them in their “benchmark” estimate.

Some of these guidelines are as follows:

1. The occupancy used to generate the wind/hazard valuation in the software must be the most accurate selection available as described in the definitions in the software (e.g. a residential condominium should use the occupancy Condominium w/o interior finishes in the MSB BVS software)

2. Valuation reports must be based upon the entire building square footage and include all components of the structure (e.g. balconies, walkways, common areas, etc.) Construction analysis, including construction details for the walls, floors and roof must be included.

3. The construction type used to generate the valuation must be based on ISO construction definitions.

4. A copy of the system-generated report (valuation worksheet) must be included with any appraisal.

5. Only full, detailed reports will be accepted

6. No adjustments can be made to the architect’s fees, labor and material costs, overhead and profit.

I exchange information with contractors and builders on a continuous basis and am familiar with their thoughts and calculations. But for insurance replacement valuation the contractor’s thinking head is not good enough.

The point that in most cases will be underestimated by the developer is the soft cost including overhead and profit. Usually soft costs (the costs which are not sticks and bricks, but all the other items like architect, engineer, etc.) range between 20% and 25%, depending on the size of the construction project.

The second most important item builders tend to look at is the quantity. The estimate to replace twenty buildings all at once will be much different than to replace one single building. And that is logical, the more you build (or buy) the cheaper it could get. Yes, size or quantity does matter. However, the insurance company is not interested in a discounted mass construction; the insurance company wants to know how much it will cost to replace one single building. This is also the reason why appraisers cannot lump-sum the buildings. Each building has to be listed with its appropriate value.

The third item, which makes a huge difference is “new construction vs. re-construction”, which is also the issue most people cannot understand. Here are some points which should make that issue a little bit more understandable (information provided by Baker Insurance):

1. Regardless of a home’s age, when rebuilding a home with severe damage there are costs associated with reconstruction that are not part of the original construction costs. As a result, these reconstruction costs need to be included in the insurance value to ensure adequate coverage to completely rebuild your home.

2. New homebuilders usually purchase materials in bulk and they realize great savings. A reconstruction contractor typically will not receive these savings. Materials for the job are usually unique and specific to the home and, therefore are usually more expensive.

3. Reconstruction contractors usually have to work around obstacles with care so as to not damage the home or other structures that remain undamaged. Time and expense to work around these obstacles adds to the overall cost of the project.

4. There is also significant homeowner involvement when it comes to reconstruction. Naturally the homeowner wants the house rebuilt just right and will regularly interact with the contractor. This can add time and expense to the project.

5. New construction overhead and profit is fairly predictable because of the repetition involved. They usually work within a given time frame with favorable time periods for scheduling work crews. Reconstruction contractors must work in a more restrictive time frame due to an unplanned event. The contractors are working on shorter notice and tighter schedules. Therefore it’s an increased cost associated with these timelines.

6. Newly constructed homes are built with the present building codes while older homes usually need to be brought up to code.

The price tag for reconstruction vs. new construction? Between 10% and 15% and most insurances will work with 12%.

When you add these three points together, the difference between a builder’s estimate and a correct insurance replacement valuation will now be a little more clear.

Rest assured, an appraiser does not want to make you pay outrageous insurance premiums, our utmost goal is to have you insured at the right value. If you are more than 80% underinsured, your insurance can and will penalize your association severely and you will have to recover the rebuilding costs with high assessments vs. increased insurance costs.

Is it worth the risk? Your call…


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