“Ideal” is a Nirvana kind of a word. It’s not just because of its feel good, rainbows in the
sky definition (“a standard of perfection or excellence”) but because contained right there inside the word itself is a unspoken admission. It’s only an idea, not something necessarily connected to concrete reality.
Worcester County residents don’t come across “ideal” anything very often in their daily routines, so few would be surprised to learn that even in something as important as determining the value of their Central MA residence, the calculation turns out to be less than straightforward. The vagueness owes to the fact that it all depends on how you look at it.
In reality, there are two quite different approaches for determining any home’s value. Ideally, both methods would produce the same value for the same home-grown property. That would be the enlightened outcome, a fine idea but it’s seldom the case. The two methods are the Market Value approach and the Replacement Cost approach. Knowing how and why they differ explains why they yield dissimilar results.
When homeowners examine their home insurance policies, they may find a breakdown of the replacement cost. The face amount of such a policy is meant to cover what the current cost would be to construct a similar building of equal quality, one that would have the same utility as the one that was destroyed. Such factors as materials, labor, the builder’s overhead, profit and fees are probably part of that calculation. In actuality, some of the costs that might be encountered may not be included, though; things like demolition of the old structure, debris removal, licenses and permits. It depends on the policy.
The market value is an estimate of the amount a buyer would pay in today’s market to purchase the same home in its current condition. Right off the bat, you can see that this would include the cost of the land so you might deduce that its market value would automatically be greater than the replacement value. Ideally, that might be true. If the
home were brand new. But for structures that have been in existence for a while, that may or may not hold true. For a home in less than top condition, the total might be less. Likewise, if the local residential market were in a slump. On the other hand, for older homes having architectural details with fine workmanship that is expensive to duplicate today, the reverse would be true. You get the idea: given the vast number of variables that can influence the difference between market and replacement value calculations, it would be miraculous if the two ever came out the same.
When you are buying, selling or even insuring your MA home, weighing market and replacement values is more than an abstract exercise. I’m here to help with those and many other issues that will help you determine how to make the choices that serve you best. Call me!…..Realty Ace, LLC