An Appraisal By Any Other Name

So here’s the $64,000 question: Does the appraisal you get for insurance purposes (other than a mortgage) give you a true sense of what your home is worth in today’s market?

The answer to that is it should, but usually doesn’t. “How can this be?” you might ask. “After all, an appraisal is an appraisal.”

Well yes, that should be the case, but because there are different methods and values for amenities of houses and properties depending on which industry is ordering the appraisal, there can be vast differences in the final value on an appraisal.

For example, the insurance industry is not really looking for a market value based on you reselling your house when they order an appraisal. When an insurance adjuster orders an appraisal, it’s usually broken down into categories with values calculated to cover what the insurance industry calls “replacement value.”

“Replacement value” represents all the variants taken into consideration when itemizing what it would cost to replace your house or its structure together with all the personal belongings and various amenities you might have in your house and on the grounds. Replacement value can be taken in various forms depending on the type of homeowner’s insurance you took out.

One type of replacement cost is called “full replacement cost,” which will cover the full replacement of your house and its contents in the event of a catastrophe. There are other levels of replacement cost taking on a lesser replacement liability, as well as dollar amount policies that limit the replacement to a specific dollar amount instead of replacement cost.

All of them share one thing in common. They use a formula to arrive at a dollar amount that the insurance companies have calculated will equal your replacement costs or dollar amount policy as they have determined, based on an appraisal that they order that calculates this formula.

The value system used by insurance companies for appraisals does not necessarily have the same values and formulas used by lenders when ordering appraisals for borrowers.

Since the insurance companies are looking for construction costs for rebuilding as opposed to the lenders, which are looking for market value of comparable homes that sold recently as well as amenities, trying to utilize an insurance appraisal in order to set a value for a house that you wish to sell or refinance will not work.

Trying to pinpoint construction costs for rebuilding, has nothing to do with what the market value is when you go to sell the house, which is why the final number on an insurance appraisal might be very different from the final number on a lender’s appraisal.

When you’re trying to determine the market value of your house before putting it on the market, the tried-and-true method to figure out the value is to base it on recent sales of comparable homes from the previous six months. Utilizing actual sales of homes in your area with similar square footage, layout, and amenities remains the most accurate way of determining market value. n

Anessa Cohen lives in Cedarhurst and is a Licensed Real Estate Broker (Anessa V Cohen Realty) with over 20 years of experience offering full service residential, management and commercial real estate services in the Five Towns of Long Island as well as the tri-state area. She can be reached at 516-569-5007 and encourages readers to send any questions and scenarios by email to [email protected].