Every house has a fair market value whether it’s for sale or not. However, the market value of a home is much more apparent when you want to sell it. That’s when real estate agents consider the current market conditions and attributes of the home and compare these to the sale prices of comparable homes in the area to determine a list price. This list price reflects what the real estate agent and the homeowner feel is the fair market value of the home.
But the list price is only one part of determining the market value of a home because buyers also have a say in what they think the property is worth. As a result, you may receive offers that meet, exceed, or fall short of the list price. The amount that buyers are willing to pay, and it puts your home’s market value in sharper focus.
Many homeowners think they need enough home insurance to cover the market value of their home, but that’s not the figure insurance companies use when they determine your coverage limits. Instead, your insurance company uses your home’s replacement cost. This is the amount it takes to rebuild your home from the ground up.
These can be two very different numbers because each considers different factors. For instance, market value takes into account the supply and demand of the housing market and the value of the land your home sits on. Replacement cost doesn’t look at either of these, but does factor in rebuilding costs, like construction, labor, demolition, and debris removal.
Let’s say you purchase a home in a seller’s market for more than the list price, paying $500,000. It’s a 2,000 square foot home that cost $200 per square foot to build, which makes the cost to rebuild it approximately $400,000.
Insuring it for what you were willing to pay ﹘ it’s fair market value ﹘ would actually mean you’re overinsuring your home. Your insurance company is only obligated to replace your 2,000 square foot home using similar building materials, so insuring it for an extra $100,000 means you’re paying premiums that don’t get put back into a claim.
You should note, however, that labor and construction costs can vary, as demonstrated by the soaring price of lumber through most of 2021. That can also impact your replacement cost estimate.
Whether your home is on the market or not, you want to maintain your market value as much as possible. Doing so helps you keep equity high in your home that can become available if you need it.
Here are some tips to keeping your market value up:
Some of these steps, like upgrading the quality of your cabinets, can increase your replacement cost estimate, and may warrant a review of your coverage limits.