Dwelling Coverage and rebuild costs too high?

[Coady Watson]

Hey all, was hoping I could get some advice from other investors in RI. Im in the process of buying my first property. Its a 3 unit multi family. Purchase price is $207k, it appraised at $235k. 

Im to the point where I need to get a homeowners policy ready. The problem Im having is the 2 companies I have talked to so far came back with insane rebuild costs. First company said $770k and the second said $690k. I understand the rebuild cost can be higher than the market value but 3 times? 

Does this seem accurate? Curious to see what others have there dwelling coverage at.

Thanks for any help in advance.

-Coady

[John Mocker]

Coady,

The problem you are facing is common in Insuring Real Estate in the RI, CT, MA, NY markets.   The purchase price is driven by the rental rates not what it would cost to replace the building.  Insurance companies offer three ways to value a building for insurance:

1. Replacement Cost:  The cost to rebuild the structure with the same kind and quality at the time of loss

2. Actual Cash Value:  The Replacement Cost minus the depreciation (tracks with the market value of the building only not the land)

3. Agreed Value:  a value agreed on by the company to be the value being insured.  Much less commonly used.

Most Personal policies (Homeowners & Dwelling Fire) from the companies providing the best rate (on a per $1000 of coverage basis) will be written on Replacement Cost.   You can get the policies written on Actual Cash Value (ACV) but it is often from a specialty or non-standard market. 

If you do go with an ACV based policy remember, a partial loss will be paid with a deduction for depreciation.  Also, if there is a Coinsurance Clause you need to have a limit that adequate or you could face a penalty.  If you have an 80% coinsurance clause, you need to have a limit at the time of loss that is 80% of what the ACV should be.  If, at the time of loss, the company determines the ACV of the building is $100,000 your limit needs to be $80,000 or more.  If not the claim payment is reduced.

Good luck on the search and feel free to PM me if you have any questions on the above.