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Cost Approach Used By Insurance Company

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Dave Smith

Senior Member
Joined
Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
Wisconsin
Several weeks ago I prepared a 2055 for a mortgage loan. Today the borrower called and said "You didn't include the cost approach. My insurance company needs that information to write the insurance coverage so I can get the loan. Please provide that information to them ASAP because this is an urgent situation."

My thinking on this is that the lender ordered a 2055 for lending purposes. The appraisal was prepared for the lender, not the borrower, and the insurance company just doesn't want to work for their fee. It is a local company. In addition, it seems to me the insurance company will want a piece of my E&O insurance company if there is an insurance claim and there is a dispute about the coverage.

I see no reason to calculate the cost on the house (its 60+ years old and functionally shows it) or share any information with an insurance company. I'm not even allowed to discuss it with the borrower.

I'm holding off even calling the borrower back but I know he will call me again. He has already called twice this morning.

Any thoughts or suggestions on this?
 

Willie

Senior Member
Joined
May 30, 2002
Professional Status
Certified General Appraiser
State
Tennessee
You can do it if you want. Just charge the crap out of them. Old house. Not applicable. If you want to do it, fine, charge them. Good time to not return phone call if you don't want to do it. Why waste a minute or hour explaining FNMA appraisal forms so some deep pocket insurance company can get free work.

I would tell them it wasn't applicable due to age. BTW, if you want to get your butt on the hook, in case of a fire or whatever, go ahead and do their request. PS, I would tell them you've taken X minutes of my time. I haven't charge a penny. Any additional consultation is $50/hour with a $100 minumum, upfront. Make them put their money where their mouth is and they will shut up. Again why is our biz to teach them the mortage loan biz. It ain't.
 

larryhaskell

Senior Member
Joined
Apr 23, 2002
Professional Status
Certified General Appraiser
State
Nevada
I would calmly explain to the homeowner that the appraisal was completed for lending purposes only. If the insurance company needs to know the replacement costs, they have their own sources. I had the same thing happen to me recently. A 7,000 +/- SF home completed as an exterior inspection only. He also wanted to know the replacement cost. In this case I didn't even return the call. I believe you're absolutely correct about the liability of providing such info. To you the floor covering was vinyl and carpet until the place burns down and then the homeowner says the floor covering was really gold bars. You have nothing to gain and everything to lose on this deal.
 

Wally Jones

Senior Member
Joined
Jan 23, 2002
Professional Status
Certified Residential Appraiser
State
Florida
Dave,

My experience has been that your suspicions are correct. The insurance company typically uses a similar method that I use (Marshall & Swift plus local builder info.) to determine cost to rebuild, but if they can get someone else to provide the same information for free, not to mention that 'ole transfer of liablility thing, then they'll take advantage of it.

If you're in the mood to try to placate the borrower, you might try explaining that you are not in the insurance business, any cost approach you accomplish is to support a market value and would not be acceptable to most real insurance companies and your client requested you not provide a cost approach (by ordering a 2055). If the borrower still isn't satisfied (which they won't be), refer any further contact to your client.

Good luck and enjoy a nice holiday weekend!
 

Carnivore

Elite Member
Supporting Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
North Carolina
I got one better idea. Get the phone number of the insurance agent. Call him and let him know how much you charge - $100.00 dollars sounds nice. Hold the phone away as he says no and slams the phone down.

End of story
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
And the correct answer is
I would calmly explain to the homeowner that the appraisal was completed for lending purposes only.


Do not do the Cost approach and let it be used for insurance purposes. The insurance company likely used RECONSTRUCTION COST NEW, not REPLACEMENT, NOT REPRODUCTION. This is a new concept w/in the insurance industry, i.e.- costs are much higher so they can insure more and charge more accordingly.

Your purpose would change, your Market Value definition is compromised, your intended users of the report would change.....and you don't want to do this anyway.

You owe the insurer and the homeowner nothing, not even the courtesy of a reply, although in the name of civility, I suppose I would call back. They are not going to like what they hear, and visa versa.
 

Mountain Man

Elite Member
Joined
Jan 15, 2002
Professional Status
Certified General Appraiser
State
Georgia
Sheesh, and I though broker LO's were lazy. :rolleyes:
They have their computers with their cost info, tell them to use it...... or shell out a really nice, heavy fee. :mrgreen: Like Terrell said, they use a different definition for "cost approach".
 

Phil Rice

Member
Joined
Apr 22, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
My 2 cents:

I have never heard of a homeowners insurance company suing an appriaser because of a problem with the cost approach.

I agree that it is not appropriate to provide this info for no extra charge. I disagree that you should refuse to do it, or not return the phone call. I would call the borrower, or call the client and ask them to call the borrower. Explain that the report you did was to satisfy the needs of the lender, and your fee was based on that scope of work. The poor homeowner just wants to get insurance. If you don't return his call, you are making it hard for him. Tell him you are willing to help, but there will be an extra charge.

If the homeowner called the loan company, and got the loan company to call you, and ask you to convert the report you did to a URAR and include a cost approach, how much would you charge to do that?

I would suggest that you offer to call the insurance company. If the borrower agrees, call the insurance company and explain that the cost approach was not part of the appraisal, but you are willing to work up that info for a fee (they may want a sketch too). If the insurance agent asks what the fee is, quote your fee (for a full appriasal?) or whatever you need to make it worth your while.

Assuming that the insurance company is not going to agree to pay your fee, this course of action will "waste" some of your time. Your goal should be to avoid an angry homeowner, which your client (the loan company) will appreciate. Think of it as the same thing as when you call a real estate agent to ask a question about a sale. Sometimes they call you back and help you out, sometimes not, but they are not getting paid any extra to help you out.

If you are not willing to help, so be it, but at least return the call so that the homeowner will know how things stand, and he can then start calling other insurance companies or whatever plan "B" is. If you are worried that the homeower is going to chew you out, ask the loan company to call the homeowner.
 

Larry Lyke

Senior Member
Joined
Feb 2, 2002
Dave ~

The correct answer to the Borrower who called you is ...

"The lender didn't order a cost approach. You'll have to call your lender. They are the client."

Other than being polite, that's the end of the conversation -- no matter what the Borrower says or keeps on haranguing about.

You might think about adding a little blurb to your Scope of Work, something like, "Expressly excluded from inclusion as an intended user is the applicant's homeowner's insurance company." Fits quite nicely into the legalese mix.
 

Dave Smith

Senior Member
Joined
Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
Wisconsin
Thanks to all for your thoughts. They confirmed my thinking.

I waited for the property owner to call back and then patiently explained it all to him. He thanked me for the information and then asked for the name of a good insurance company in the area. I referred him to my insurance carrier. Now its up to them.

And I can go home to enjoy the weekend. :p
 
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