Replacement cost and insurance companies

[ATNA]

Anybody else seeing this from their clients? Didn't realize we now provide a service for the insurance companies. If the CA isn't relevant for a credible result, I'm not completing it to satisfy an insurance company.

"Over the last few months, we have struggled with insurance companies providing documentation to support the replacement value of a property which is required by the agencies such as Fannie Mae and Freddie Mac. The agencies, however, do allow our appraisal professionals to provide this information through the completion of the Cost Approach to Value on the appraisal reports. With this, we ask for your assistance in the completion of the Cost Approach to Value whenever possible. Many of you already complete this information today and for that we are very thankful."

 

[Tom D]

insane, the insurance company have their own cost programs & their own actual experiences. the lender thinks they guess at it. such stupidness.
and technically, if you are off the cost approach and the buyer totally depended on it, expect a fire lawsuit.

 

[Terrel L. Shields]

My CA explicitly excludes use for insurable purposes. As @Tom D points out, insurance companies use a version of cost book that is basically a reconstruction value. It is higher than replacement value because the insured value assumes you will have demolition of the damaged structure to deal with as well. The remains of the house does not just disappear. These Reconstruction Values typically run 10-15% higher RCN.

As for the CA, I think it should be required that all appraisals have 2 of the 3 approaches to value developed. That's why they exist. While the SA is usually the go to approach in residential cookie-cutters, what about the unique properties? The properties with large sites where the appraiser pulls a number out their *** for the land value? Develop the CA with a 3 vacant land sales grid. What's it take? 5 minutes? Half the appraisers out there have nary a clue how to even ID, let alone adjust for functional and external obsolescences. How many come on this site complaining they had to develop the CA and its 20% higher than the SA.... well, duh. You just identified an additional obsolescence above physical deterioration. Why do you think effective ages rise dramatically in a downturn?

Again, pools, outbuildings, barns, shops - apparently the best many appraisers can do is simply apply a pull from *** value that's usually $5,000, $10,000, or maybe even $20,000 without one shred of evidence to support either that extracted value nor a depreciated cost. And depreciated cost is a valid way of making an adjustment, which is why you need more than just a SF residential cost book. You need a cost book that breaks down values (the break down method) by individual components, or you need to scour the countryside for barn, shop, and pool costs... And pools, in particular, vary by a full magnitude. I've seen $120,000 pools and $12,000 pools. They are not the same.

 

[Artemis Fowl]

The cost approach presented in this appraisal is specific to the definition of market value. It is not compatible with the definition of insurable value and should not be relied upon to establish insurable value.

 

[Jerry Bone Jr]

There is no insurance company stupid enough to rely on an appraiser's cost approach.

 

[sputnam]

It's not your problem. If your Client requests an appraisal that includes Insurable Value, you accept the assignment or you decline it.

 

[Mark K]

There is no insurance company stupid enough to rely on an appraiser's cost approach.

Maybe not but there are certainly mortgage companies that require the borrower to have sufficient insurance to rebuild and they base that determination on the appraisers CA.

They used to require enough insurance to cover the mortgage amount but there are problems when the loan is, say, 50% LTV. 50% of the property value likely won't rebuild it and the mortgage company doesn't want to be left holding the bag on a burned out house if the owner walks because he doesn't have the $$ to complete the job.

 

[ITVSME]

Fannie Mae allows the lender to use CA to check adequacy of insurance coverage.
It's wrong, neither Fannie Mae nor the lenders care.

Parties who have financial interest in the deal going through quickly want your CA because they know it's a lower number than what the insurance company will use (or the lenders' auditors who have the same program).
The homeowner/borrower doesn't know the difference.
Neither the real estate agent not the insurance agent nor the loan officer will be held accountable for the under-reported value.
The underinsurance will either be found at a follow-up audit of the insurance policy or the loan, or at the time of loss.
The homeowner/borrower will suffer consequences in the form of unbudgeted increase in premium or unexpected shortfall in claim payment.

Here's what I see as the tricky bit.
An appraisal that was ordered for market value and has disclaimer against use for insurance purposes, is likely in a defensible position.
If the assignment includes a specific request for an insurable value estimate, and the assignment is accepted, then the ice is thinner.
Appraisers' insurance may specifically exclude for work for insurable value estimates (you should check).
If appraiser makes statements that their estimate is suitable for insurance purposes, without them having read the policy and/or using cost guides that say they're not licensed or suitable for insurance purposes; they could be more vulnerable to litigation.

If the assignment includes a request for an insurable value estimate, you could decline that part of the assignment
but offer (for whatever marginal increase in fee you deem appropriate) to collect the data points necessary
for lender and/or insurance carrier to complete a detailed estimate using their software.
To solidify scope of work, ask them to provide the form they'd like you to fill-out (don't assume they all want the same questions answered).
That makes sense. You're on-site and have the tools and knowledge to collect the data accurately.
If they decline, you pick up an extra level of defense.
If they accept, you pick up a little extra money for what should be very little additional work.