When buying a house, you are buying both the house and the land it is built on.
The market value of a home is usually based on an appraisal by a licensed professional. They start by estimating the value of the land based on the property’s location and lot size. Then the appraiser will use the size and build-quality of the house to figure the cost to rebuild it. The rebuild cost is then depreciated based on the age of the house and its condition. As such, Market Value is based on the depreciated cost of rebuilding the property plus the lot value.
An insurance company though is only interested in the cost to rebuild the home. So the value of the land is not a consideration when setting the Dwelling coverage of the home. The company will insure the house to the ‘rebuilding’ or ‘replacement cost’ before depreciation.
An older home might seem over-insured because of depreciation for market value. While a newer home might seem under-insured based on the price you paid for the home. The lesson here is that market value does not equate to replacement cost for your home policy.
If you’re unsure if your home’s insured correctly, contact Cronin Insurance and we’ll help you.