Recently I had a conversation with a realtor friend who had a deal fall through for a parcel of land because the buyer found out the construction costs have gone up so high that it rendered the deal untenable. We have all heard stories of lumber prices jumping, supply chains being disrupted and labor shortages. It all translates into higher costs for construction.
A few years ago, Joan and I owned a small parcel of land and were planning on building a getaway house on it; nothing fancy. When our conversations began, the cost was figured at around $250 per square foot. A few years later, they had increase significantly to $350 for the exact same plan. This was prior to Covid. In the story about the deal that fell through, that buyer was quoted $650 – $700 per square foot. Now, I don’t know if he had gold plated fixtures for his bathroom or not, but it sure got my attention. I knew that costs had gone up, but this was the first quantifiable proof for me.
The conversation with my friend rattled around in my head for about 24 hours before it occurred to me, that if we had another fire and a loss of our home, the replacement coverage that we currently have would be way below the cost to replace the house. In other words, the policy limits would only provide for a fraction of the previous structure and not the entire house. I don’t know about you, but for me I have grown accustomed to the space we have in our house and don’t see any of it as optional. If we had a loss, I would want at least what we currently have.
The next call was to my trusted insurance agent. Yes, I use professionals with whom I have a relationship. It makes all the difference vs finding the cheapest coverage on-line. I presented this quandary to him and asked what could be done to increase the limits. He told me that he would need a few days to figure it out. We spoke shortly after that with our agent and the underwriter and explained the increase in building costs in our area. They were able to increase the policy limit due to the more expensive replacement cost. Of course, this increase cost money, but for peace of mind I will gladly make that exchange.
If you consider how this may impact you and your home, and I recommend that you do, make sure that you are considering the replacement cost of your home instead of the current market value (which has also gone up). Here is an example: Let’s say that you have a 2,000 square foot home with a current market value of $600,000. This home has appreciated in value since you moved in and insured it. Let’s say that the policy limit is closer to $500,000 because you bought it years ago. If you had a total loss, it may cost closer to $1 million to rebuild it. Here I am using a more conservative construction cost of $500 per square foot (2,000 sq. ft. x $500 = $1 million). This would mean that you could build half of your home, because your policy limit is at $500,000 and the total cost would be twice that.
So, you probably need to decide which half of your house you like the best or make a call to your trusted insurance agent to pose the problem to her. This is just a reminder that many things in life need to be evaluated and reviewed periodically. Your financial plan, your investment strategy, beneficiary designations, your estate plan and your property and casualty insurance policies are just a few of those important things that we tend to cross off our mental list of having covered. Things change and we need to stay on top of those changes.
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