Replacement Cost, Market Value, Purchase Price- What does it all mean?
When you are trying to determine the appropriate replacement cost for your condominium building, are you often confused about what number to pick? Well, if you are, you’re not alone.
When buying a condominium unit, especially for the first time, you’re bombarded with a bevy of numbers representing different aspects of the sale. But from an insurance standpoint, the only number or value to be concerned with is the replacement cost of the property.
So, how do you determine replacement cost?
Let’s start off with what not to do. The insurance value of a condominium building should not be determined by the combined real estate value of the units, or the cumulative purchase price of the units. This is a common mistake that, in most markets, will artificially inflate the insurance value.
For example; suppose you have a 4 unit condo on Beacon Street, and each unit has a real estate value of $1,000,000. This does not translate to an insurance value, or replacement cost, of $4,000,000. It should not be the number you choose when determining a limit for your master insurance policy. The only thing that you, as an association, should be concerned about from a replacement cost standpoint is whether you will have enough money available to rebuild the property if there was a major loss.
Is it $4,000,000…$2,000,000…$1,000,000? Well, that’s the big question.
Replacement cost determination doesn’t have to be complicated.
The simplest way to determine replacement cost is to use the square footage method. It involves simply taking the square footage of the building and multiplying it by a factor of anywhere from $200 to $300 per square feet depending on the type, age & condition of the building.
In the case of our 4 unit condo building on Beacon Street, if this property was 4500 square feet, you would simply multiply 4500 by $300 per square foot to come up with a replacement cost of $1,350,000. This at least gives you a starting point.
Still in doubt? Navigate to our handy Replacement Cost Calculator!