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Underinsured

Discussion in 'General Appraisal Discussion' started by Bill Rose, Sep 17, 2004.

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  1. Bill Rose

    Bill Rose Senior Member

    0
    Aug 25, 2003
    As a result of the wildfires last year in San Diego and elsewhere, many of those who lost their homes are finding their insurance coverage falls way short of replacement cost. I can't ignore my intuition that overvaluation is a key factor.

    Thoughts?
     
  2. George Hatch

    George Hatch Elite Member

    303
    Jan 15, 2002
    Professional Status:
    Certified General Appraiser
    State:
    California
    If they were insured based on an overvalued appraisal, wouldn't the insurance also be excessive?

    The way I heard it explained, some people didn't have insurance at all, and the policies of many others had not been adjusted or updated. Still others started off underinsured because their agents took shortcuts with the cost estimating software and under estimated the costs.

    Then too, there's always the role of the contractor - some of these guys are really packing their bids, if you know what I mean. I know this to be a fact because I routinely see bids that correspond very closely to the M&S costs and I see other bids that are way high but usually only in a couple areas like framing, cabinets, flooring and supervision. I once saw a bid for a 2,500 SqFt home that included $100K for flooring. Invariably, when the borrower goes back to the contractor that bid starts to contract back to more realistic norms. They don't often get all the way back to where they should be but it usually gets at least halfway there.

    Bad appraisals can cause a lot of damage, but I'm not seeing the connection to the insurance issue, unless maybe it's one of not disclosing factual conditions. I'd be looking more at the greedy contractors.
     
  3. Richard Carlsen

    Richard Carlsen Elite Member

    0
    Jan 15, 2002
    Professional Status:
    Licensed Appraiser
    State:
    Michigan
    Most insurance policies will have some sort of an automatic increase for inflation.

    However, in areas of meteoric value increases, which usually is combined with meteoric rises in building costs, unless the HO specifically requests adjustment from the insurance company, it is highly likely that the coverage will be too low.

    I seriously doubt that this is one problem that can be laid at the feet of the appraisal profession. In fact, a good appraisal would more than likely have helped alert the HO to the fact that the house is under-insured.
     
  4. Carnivore

    Carnivore Elite Member

    4
    Jan 15, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    North Carolina
    Bill

    I fail to see the relationship of Insurance coverage and mortgage origination, especially refinance origination. How would one drive the other. The trend in residential appraisals has been up, up and up even more up becaue of skippy.

    Your post suggest that insurance coverage is based on market and not actual cost. We know this is not true. Your post also suggest that you got this tidbit from the news media. Give it up man, did Dan Rather tell you this! :rainfro:
     
  5. airphoto

    airphoto Senior Member

    0
    Jan 15, 2002
    Professional Status:
    Retired Appraiser
    State:
    Pennsylvania
    Usually, 'replacement cost' is the basis of insurance .. which has absolutely nuttin' to do with market value ..
     
  6. Pat Butler

    Pat Butler Senior Member

    12
    Jan 17, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Illinois
    I would think that areas of high appreciation are mostly seeing an increase in land values rather than a huged increased in construction costs.
     
  7. Fred Carter

    Fred Carter New Member

    0
    Mar 21, 2003
    Professional Status:
    General Public
    State:
    California
    Under-valuation in property insurance is as endemic a problem to insurance underwriters as pressure from lenders to hit a number is a problem for appraisers. There are powerful forces creating both issues.
     
  8. Bill Rose

    Bill Rose Senior Member

    0
    Aug 25, 2003
    No Andy, Dan hasn't spoken to me in years.

    Here's what's stuck in my mind: These people are finding they're underinsured by $100k or more. True, building costs have risen dramatically, but what I'm wondering is this: If building costs are market-driven rather than cost-driven (and why wouldn't they be?), if the overall market in the area has been artificially inflated and homeowner's had not had a recent appraisal, have they been caught in an upward spiral?
     
  9. Pat Butler

    Pat Butler Senior Member

    12
    Jan 17, 2002
    Professional Status:
    Certified Residential Appraiser
    State:
    Illinois
    I can understand a modest increase in buidling materials. But if material costs get too high then why don't homebuilders purchase materials by the truckloads from out of state and truck them in? I mean, if you guys in CA have 25-30% increase in housing values each year, then does that mean 25-30% increase in building materials? That much of an increase would make it affordable to purchase materials out of state. Heck, plywood costs just about the same at Home Depot here as it did three years ago when I added on my house. Our land values are going up at a good clip however.
     
  10. Terrel L. Shields

    Terrel L. Shields Elite Member
    Gold Supporting Member

    623
    May 2, 2002
    Professional Status:
    Certified General Appraiser
    State:
    Arkansas
    After Hurricane Andrew, insurers realized they were screwing themselves with full replacement policies....they were paying out 40-50-60% more than they were insuring..ie.- rate was based upon $100,000 home but ended up paying $150,000 to replace. Now they are capping full replacement policies and pay only the max on the insurance policy.

    The cost of reconstruction (Reconstruction cost new vs Replacement Cost New) is higher than replacement, in part, because where numerous houses are destroyed and rebuilt at the same time, local building costs zoom up. That $100,000 house is costing full 25-50% premium due to the sudden demand. That's the reason for that special page in Marshal and Swift relating to disaster construction. If a single family home is burnt, the building cost remains the same locally.

    The insurance companies have a vested interest in over-appraising the home to max out the premium but insuring that the homeowner gets enough money to rebuild.
     
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