The topic of market value verses replacement cost has always been in discussions. However, we are seeing some unprecedented realities in 2021 spurring this to new heights. Especially when you throw in the appraised amount.
What is Market Value
The amount a home will sell for is the market value. This can go up and down for all sorts of reasons. School districts, neighboring homes, and area popularity are three main factors that affect the market value of a home.
An Appraised Value
The appraised value is the amount the mortgage is willing to lend toward a purchase, refinance, or escrow analysis. If the purchase price is higher than the appraisal, the buyer must have enough cash to cover the difference. Or the seller be willing to come down on the sale price to match the appraised value.
Replacement Cost
This is the amount the insurance company is saying it would cost to rebuild your home in the event of a total loss. This is determined by the foundation type, square footage, framing, roofing, and interior details of the home.
What happens if these numbers are not all the same?
Right now, we are seeing these numbers varying all over the place. There is a shortage of homes for sale, and the ones that are for sale are selling for double what they did just five years ago. Many end up in bidding wars and the highest bid takes the home.
However, lets run a quick scenerio.
John might be willing to pay $500,000 for a 2000 sq ft modest home in a fantastic neighbor. This determines the market value.
The appraised value at the time of John’s offer shows the home value is $415,000. The mortgage company will only lend him a maximum of this amount with a $0 down payment program.
And when the insurance quote comes in, they are saying the replacement cost is $375,000.
In this situation, John would need to bring $85,000 to closing to make up the difference between the appraised value and the market value he’s willing to pay.
The mortgage company is also going to require a replacement cost estimator and a guaranteed replacement cost insurance policy so if they loan over the amount the home is insuranced at, they have protection for the investment to be rebuilt.
If you’re going through this process and have additional questions, please reach out to me. I’m here to help. kaylagulick@tnsig.com
