Up for renewal on home insurance and was thinking about dwelling coverage.

With cost of materials going bonkers, what are you guys using as an average per sq ft cost to replace in TX?

USAA was jacking up my rate last year because of material costs. They were ball parking it at $160/sf for replicating the house with material costs. But that was before the whole "housing market is on fire" run we've had since January. So I suspect it's going to be higher by a fair bit.

Red Pear Luke said:

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USAA was jacking up my rate last year because of material costs. They were ball parking it at $160/sf for replicating the house with material costs. But that was before the whole "housing market is on fire" run we've had since January. So I suspect it's going to be higher by a fair bit.

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Same here, on a rental. Actually closer to $170/SF.

Closing on another rental next month and shopped with a different insurer. They quoted dwelling amount as the same as the purchase price. I actually had them bump it up a little just to be safe.

Insurance Agent here-Carriers themselves always have some variance between their estimates. USAA is notorious for inflating the dwelling coverage much higher than other carriers. They can sell it as "a better policy" but truthfully it's just about increasing the premium and the deductible which is most of the time a % of the dwelling coverage, so you are paying more to have the opportunity to use your insurance and them less. Since the deductible is based on dwelling coverage, there is some personal risk tolerance with each situation and how to approach it. You can try to push for the lowest possible dwelling coverage to keep deductible low on the hope that worst case scenario of the home burning down won't ever occur, but smaller events like a pipe busting or hail storm will.

BrianDemarais said:

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Insurance Agent here-Carriers themselves always have some variance between their estimates. USAA is notorious for inflating the dwelling coverage much higher than other carriers. They can sell it as "a better policy" but truthfully it's just about increasing the premium and the deductible which is most of the time a % of the dwelling coverage, so you are paying more to have the opportunity to use your insurance and them less. Since the deductible is based on dwelling coverage, there is some personal risk tolerance with each situation and how to approach it. You can try to push for the lowest possible dwelling coverage to keep deductible low on the hope that worst case scenario of the home burning down won't ever occur, but smaller events like a pipe busting or hail storm will.

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Independent agent here: We have State Auto, but don't sell it because they're too high on the Gulf Coast. Got this today from them:

• To account for these increasing costs, an inflation factor is applied to every Homeowners and Dwelling Fire policy renewal increasing the coverage A to ensure policies continue to be adequately insured. This increase in coverage A will be part of the policy's renewing premium and is needed to cover the rising cost of building materials and labor.

• Additionally, new business tools will continue to be automatically updated quarterly and therefore will reflect the most up-to-date reconstruction costs.

We will continue to monitor these costs and make the necessary adjustments as market conditions change. We hope these increases will help your insureds manage their budgets while providing the limits they need.

I have USAA and am at about $156 a square foot. Honestly worried that's low. Go read any new custom build thread and the price per square foot of a single home on a lot is insane. Shoot track build homes in new neighborhoods in Katy are selling for $190 a square foot.

I think many people are way under insured for a total rebuild.

Aggie71013 said:

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I have USAA and am at about $156 a square foot. Honestly worried that's low. Go read any new custom build thread and the price per square foot of a single home on a lot is insane. Shoot track build homes in new neighborhoods in Katy are selling for $190 a square foot.

I think many people are way under insured for a total rebuild.

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As someone building a house in DFW - I guarantee you the new builds are over $200/sf, we are currently at $198/sf with a large lot...

it's an interesting exercise to think about how much to insure your home for.

my neighborhood is made of of mostly 1950-60's ranch houses where the remodeled homes are trading for around $125-$150/sqft for the structure. About 1/3-1/2 of the purchase price is land in our case. Houston Heights has plenty of homes where the land is more like 80% of the total value.

In that case, does it make sense to insure the house at $200/sqft replacement value, which is higher than the total cost of most of these home? Seems like you're going to be way overpaying for your policy and deductible if there are any (less than catastrophic) claims on the home.

Obviously, a lender is going to argue that replacement value is what they care about but i(n my mind) that would be like buying a 1970's office tower downtown for <$100/sqft and using $800/sqft for replacement value because that's what Hines spent on their last tower. I know this is an imperfect comparison, but the twisted logic is the same to me.

There's a problem with this approach. It's not about market value but replacement value. I believe you can insure your home for as little as 80% of replacement (not market) value. If you go below that, any payout on any claims you submit for any amount will be significantly reduced did to under insurance.

In other words, you can't just insure for market value because you could choose to walk away from your destroyed home and but another one next door. Pretty much every situation, especially tract homes, market value is lower than one off rebuild price.

Possibly. It's just further disconnected when you're talking about a structure that's nearing functional obsolescence.

Would be nice if there was a system where you could just buy "gap" insurance, which would make the lender whole for whatever the loan balance was and call it a day. I'll caveat that this is probably a terrible idea with many obvious issues.

As far as insurance goes, you need to detach your thinking of the market value is X, with the land portion as ~.4X and the structure is .6X or some other derivative. Insurance doesn't care about market value or land value, just what the structures cost to replace in TODAYS market with TODAYS like kind and quality. Meaning your home may be of 70s or 90s vintage, but if it burns down insurance cant go out and find 70s or 90s materials (presumably at a discount) to rebuild your home, they are going to have to pay for current market materials and labor to rebuild your home - even if it was "dated". I see this a ton in neighborhoods where mcmansions were built for cheap, and still sell for cheap, but no way could be rebuilt for that same cost ex the $350k market value 3,750sf home. Currenr real example, we insure a home for $5.5M that is selling for $2.7M, new buyers want us to quote their insurance, home is uber high end, just in an area that does not command the market value that it would cost to actually build the same structure...i guess as a buyer you consider that a win.

I totally get the lender (and insurance companies) point of view, but it just seems strange. I don't know how you completely separate land value from the equation.

to me, it's analogous to buying a 20 year old Camry and insuring it to be replaced with a brand new Lexus.

Maybe I'm crazy.

The value of the lot essentially serves as the "gap" insurance you mentioned. Example, someone buys a $2million house in Highland park and insurance puts the dwelling coverage at $1million because that's how much they estimate it would cost to rebuild that house tomorrow. Even if the house burns down, the value of that lot is $1million then insurance rebuilds for $1million so everyone is made whole. That same home insured at $1million and cost $2million to purchase in HP might be a purchase price of $750k in a rough area with high crime, but it would still cost $1million tomorrow if they had to rebuild it, so despite a purchase price of $750k it would be insured at $1million.

that's my point though. In most cases, replacement cost is so high compared to the actual value of the home, that you essentially get no credit for the land value.

Using Highland Park vs the hood is an extreme example, but as mentioned above, with building costs where they are right now, replacement costs are more than total house value, even in "nice" areas where they lots are worth 250-300K.

There are large homes in Bellaire built in the last 15-20 years that will trade for less than their replacement value, and the lots are worth ~$400-500K.

Because you can't insure land (from a property standpoint). Its also not a balance sheet situation where the sum of the insured property + land value has to equal the market value. It really just comes down to the cost of the sticks and bricks, and its (near) impossible to replace a 50 year old home with 50 year old sticks and bricks, while in theory it could be done, it would be exponentially more expensive to source those materials. Can be a big deal when insuring historic homes that have to be replaced with period finishes/materials/craftsmanship.

And your analogy of the 2 cars is the difference between the two loss settlement options - Actual Cash Value and Replacement cost value. If you have ACV coverage then you're getting paid for what that old Camry is actually worth in today's market i.e heavily depreciated. If you have replacement cost loss settlement then you are getting the cost to replace with like-kind materials/construction in the current market. In most cases it makes sense to have replacement cost if its available.

I understand the dilemma for the lender and insurers standpoint. That doesn't make it a rational transaction for the homeowner though. It's the lenders money, so it doesn't have to be rational...but this is a discussion board.

To go back to the car analogy (you missed the part about replacing the Camry with the Lexus ), no sane person would insure the 20 year old car at replacement value...they would get liability and call it a day. In our example, they're insuring their $5K car for $40K. I would just drive it in a lake.

If your have a loan, you don't have that choice with a home. You're essentially forced to insure the cost of a home that has absolutely nothing to do with what you're living in, apart from the approximate size.

Lender wants to be whole and not end up with an empty lot, I get that. I'm just pointing out that this phenomenon has been exacerbated by the huge run up in construction costs to where you have some market inefficiencies that I find interesting. Maybe there's a way we can pool our money and arbitrage this.

It's a similar reason that "class B/C" multi-family has been such a solid investment over the past decade. As you mentioned, you can't realistically build Class C because it costs about the same to build a workforce apartment as it does to build a "luxury apartment (Ric Campo at Camden mentioned it was something like 10-15% savings to build vanilla over what they typically do). Since the older complexes are often torn down and replaced with more expensive product, folks that can't afford Class A have limited options.

Presuming the Harold Farb specials on Braeswood have some debt, are they required to insure at replacement value? that would get expensive quickly. I'm assuming they have different rules in place.

Anyway, I appreciate your feedback. It's an interesting conversation for me,

Most lenders are fine with you insuring the home based upon the estimated replacement cost and just want to see a replacement cost calculation, so the 2 bed cottage on the $1M lot can be insured for $200k. Some lenders require the insured value to cover the loan amount. I'm not sure I've seen a lender require the home be insured to the market value/sales price. So if thats the case in most situations how is the homeowner getting screwed?

when you're talking about $170/sqft replacement cost on a 3,000 sqft house (or the 5,500 sqf McMansion from 2000) that adds up quickly.

to your point though, what would it realistically cost to build a (one off) 1,000 sqft home in this market? Probably at least $250K.

So are you saying we shouldnt insure to value? Because thats one of the fundamental tenets of insurance that the actuarial models are based upon.

And I've had several conversations with wealthy people who want to insure their home for .50x of its replacement cost and self insure the rest because they are comfortable with it, but carriers dont want any part of that business.

If theres an inefficiency it might be there, but my guess is that type of policy writing comes with a lot of litigation on the back end once the S hits the fan and the homeowner is actually faced with replacing half their house out of pocket.

Diggity said:

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when you're talking about $170/sqft replacement cost on a 3,000 sqft house (or the 5,500 sqf McMansion from 2000) that adds up quickly.

to your point though, what would it realistically cost to build a (one off) 1,000 sqft home in this market? Probably at least $250K.

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Slab on grade, entry level standard finishes, then 1,000sf would be about half that and probably much less. I know, I build 10 a month of similar size and on their own lot.